Higher Interest Rates: No Longer a Death Sentence for Gold

By Hard Assets Alliance Team

By Justin Spittler, Hard Assets Alliance Analyst

The announcement by Bernanke & Co. that the Fed would stay the course with its asset-purchasing program until it sees more evidence of a strengthening economy sent shock waves across the investment world. The Dow and S&P 500 has rocketed to all-time highs, and the dollar has plummeted. Interest rates have been dealt a stiff blow.

Though labeled as “stunning” by the mass media, the decision by the Federal Reserve supports what many in the alternative economics camp have been saying for years, which is that the American economy would come crashing down if the Fed were to scale back its monetary life support.

The very mention of the Fed tapering its asset-purchasing program was enough to send long-term Treasury rates on an historic upward march. While the Fed stated that it will not increase yield until 2015 or later, higher rates are ultimately inevitable given the unprecedented expansion of the US money supply.

In light of recent events and the historical, negative 82% correlation between gold and US real rates, I imagine many of our readers out there are interested, if not concerned, about how the yellow metal will fare when rates eventually do snap back to reality.

Relationship Between US Real Rates and Gold Deteriorating

Conventional wisdom suggests that higher rates are bad news for gold. However, as detailed in a recent special report by the World Gold Council, an environment of rising rates is not necessarily a death sentence for the yellow metal. In fact, excluding the high real-rate environment of the late 1970s and the early 1980s, US real rates have actually exerted little influence on gold prices. Going forward, this is more likely than ever to be true, due to the dramatic evolution of the gold market over the past two decades, which has been highlighted by a shift of influence from the Western to the Eastern world.

Though it stings of cliché to say it, the reality of the situation is that this time is different. Whereas higher interest rates may once have been enough to send gold prices into a tailspin, today’s gold market is marked by a weaker US dollar as well as the overwhelming majority of gold demand originating from China and India. Furthermore, when higher rates do eventually manifest, it will not likely be due to an improving economy but rather because of elevated risk perceptions associated with US debt. Given the market’s ongoing transformation, we remain bullish on gold in both a rising and falling interest-rate environment.

Although the relationship between US interest rates and gold has deteriorated significantly, benchmark yields will likely continue to influence price volatility, especially in the paper market, due to the size and liquidity of Western markets. However, as we like to stress, investing in gold is all about understanding the big picture, and there is no better way to play the fundamental forces acting upon gold than to take possession of physical product.


The Hard Assets Alliance website and the SmartMetals Investor are published by Hard Assets Alliance, LLC. Information contained in such publications is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The information contained in such publications is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in such publications are those of the publisher and are subject to change without notice. The information in such publications may become outdated, and there is no obligation to update any such information.

Any Hard Assets Alliance publication or website and its content and images, as well as all copyright, trademark, and other rights therein, are owned by Hard Assets Alliance, LLC. No portion of any Hard Assets Alliance publication or website may be extracted or reproduced without permission of Hard Assets Alliance, LLC. Nothing contained herein shall be construed as conferring any license or right under any copyright, trademark, or other right of Hard Assets Alliance, LLC. Unauthorized use, reproduction, or rebroadcast of any content of any Hard Assets Alliance publication or website is prohibited and shall be considered an infringement and/or misappropriation of the proprietary rights of Hard Assets Alliance, LLC.

Hard Assets Alliance, LLC reserves the right to cancel any subscription at any time. Cancellation of a subscription may result from any unauthorized use or reproduction or rebroadcast of any Hard Assets Alliance publication or website, any infringement or misappropriation of Hard Assets Alliance, LLC's proprietary rights, or any other reason determined in the sole discretion of Hard Assets Alliance, LLC.

Affiliate Notice: Hard Assets Alliance has affiliate agreements in place that may include fee sharing. If you have a website or newsletter and would like to be considered for inclusion in the Hard Assets Alliance affiliate program, please contact us. Likewise, from time to time Hard Assets Alliance may engage in affiliate programs offered by other companies, though corporate policy firmly dictates that such agreements will have no influence on any product or service recommendations, nor alter the pricing that would otherwise be available in absence of such an agreement. As always, it is important that you do your own due diligence before transacting any business with any firm, for any product or service.

© 2013 Hard Assets Alliance, LLC.

Posted 11-21-2013 5:31 PM by Hard Assets
Filed under: ,