Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19
Gold Price Gann Angle Update - 10th July 19
Crude Oil Prices and the 2019 Hurricane Season - 10th July 19
Can Gold Recover from Friday’s Strong Payrolls Hit? - 10th July 19
Netflix’s Worst Nightmare Has Come True - 10th July 19
LIMITLESS - Improving Cognitive Function and Fighting Brain Ageing Right Now! - 10th July 19
US Dollar Strength Will Drive Markets Higher - 10th July 19
Government-Pumped Student Loan Bubble Sets Up Next Financial Crisis - 10th July 19
Stock Market SPX 3000 Dream is Pushed Away: Pullback of 5-10% is Coming - 10th July 19
July 2019 GBPUSD Market Update and Outlook - 10th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Gold And Interest Rates…GET IT STRAIGHT

Commodities / Gold and Silver 2017 Jan 23, 2017 - 11:31 AM GMT

By: Kelsey_Williams

Commodities

Over the past couple of months there have been several headline articles regarding the relationship between gold and interest rates. Most of them are well-meaning attempts to convey information about recent changes in the markets as interest rates head higher.

In several instances, however, the author(s) have tried to explain a ‘perceived’ correlation between rising interest rates and the value of the US dollar – in a very positive manner. And they have imputed a similar correlation – albeit negative – in other statements with respect to Gold. In both cases they are incorrect.


“Higher rates boost the value of the dollar by making U.S. assets more attractive to investors seeking yield.” …WSJ 4JAN2017

The higher rates might be attractive temporarily to investors seeking yield but they do nothing to “boost the value of the dollar”. In fact, historically speaking, the higher the interest rate, the more suspect is the value of the dollar (or any other currency – for example, the Mexican Peso 1982) .

Between 1971 and 1980, interest rates in the U.S. climbed to mind-numbing levels. The benchmark 10-year Treasury Bond sported a whopping yield on the north side of 15%! The higher rates did nothing to boost the value of the dollar. In fact, during the entire period, the value of the US dollar plummeted. This was reflected accurately in the US dollar price of Gold which rose from $45 per ounce to $850 per ounce – a nineteen fold increase.

“Because gold doesn’t bear interest, it struggles to compete when interest rates rise.” …WSJ

Gold does not “struggle to compete” with anything. Gold is real money. Its value is intrinsic. Any measurable changes in its nominal price are inversely attributable to one thing only – the value of the US dollar.

The implication apparently made by the author is that interest-bearing assets are preferable to gold. In that case, please see my earlier paragraph above “Between 1971-80…”.

We are currently experiencing an extended period of artificially low interest rates. Nothing in our country’s history compares to it. Any return to normal, free-market determination of interest rate levels should be welcomed. Unfortunately, that is not likely to happen.

The extremes experienced in the 1970s were the result of inflation foisted upon us by the government and the Federal Reserve. This began back in 1913 with the origin of the Federal Reserve. Today’s extremes of zero interest and negative interest are the results of Federal Reserve influence in order to combat the variety of negative symptoms arising from the problem which they themselves created – a US dollar that has lost ninety-eight percent of its purchasing power.

Generally, in a free market, interest rates will seek their own level. That level will be reflective of: 1) credit supply and demand and 2) credit risk factors.

With the overwhelming amount of US Treasury debt which is placed continuously, there are two other factors which have become just as important and critical in determining the level of interest rates: 1) inflation (premium) and 2) ‘crowding out’.

Inflation is what the government does best. The erosion in value of the US dollar has been intentional and continuous for over one hundred years (practice makes perfect). As a result, lenders must always allow for the eventual return of their capital at a lesser value. Therefore, all interest rates have an inflation ‘premium’ built into them which helps compensate for the expected loss in value over the duration of the loan.

Re: ‘crowding out’… The US Treasury is the largest borrower in the entire world. The size of their debt dwarfs all other lenders. Hence, it has a much bigger influence in the credit markets. Every other lender and borrower gauges their own activity – especially rate setting and loan duration, and sometimes timing – with respect to whatever is occurring in the US Treasury Market.

The major banks that initiate the placement of US Treasury debt do so with an absolute priority afforded to no other lenders. The US Treasury debt must be subscribed fully and strongly. It is the source of funding for the ongoing day-to-day activities of government. And since the government doesn’t care how much they have to pay in interest (you don’t really think they care, do you?) they get what they want.

Gold bears no interest for a very specific reason. It is real money. Furthermore, it is original money.

The US dollar and all paper currencies are substitutes for real money. They are an outgrowth of warehouse receipts for real money (gold). More recently they were IOUs for real money (redeemable for and convertible into gold). Now, they are pieces of paper which supposedly represent ‘real wealth’.

Owning and loaning dollars has its own set of special risk factors. Thus, any interest earned is a form of compensation for assuming that risk.

By Kelsey Williams

http://www.kelseywilliamsgold.com

Kelsey Williams is a retired financial professional living in Southern Utah.  His website, Kelsey’s Gold Facts, contains self-authored articles written for the purpose of educating others about Gold within an historical context.

© 2016 Copyright Kelsey Williams - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules