Interest rates have a huge effect on gold and silver prices ….. Until they don’t.

The common wisdom is that increasing interest rates will have an opposite effect on the gold price, which in a way makes sense. Higher interest rates attract funds away from  non-interest producing assets, however, historically this has not been the case. The actual correlation between interest rates and gold is only about 28% over a fifty year period.

Within a twelve month period of the interest rate hikes, the gold and silver prices rise, statistically 61% of the time. Often expectations of future events supersedes the natural interest consideration. So the possibility of systemic events causes the prices to rise despite the continuing interest rate hikes.  

Should investors see the interest rate hikes as insufficient to compensate for expected inflation, they will happily invest in protective assets. For example interest rates at 4.5% and real inflation  over 15%, so an additional 0.75% hike is not going to have the ‘intended’ effect.

While we are on the topic of inflation, let’s quickly look at how it is caused. According to the Mises institute inflation is caused by the bringing into existence of excess currency, (although I hesitate to call it money). So the effect of raising interest rates does not fix the original causative factor. The way to fix the issue is to remove the excess funds from the system which causes prices to rise, in theory we would want to see low rates and ample funds for projects benefiting society, building, exploring, developing and discovering. Raising reserve requirements would provide more security within the banking system and remove excess funds as the banks would need to be more responsible in their lending.This is a difficult move politically and in many places the reserve ratio sits at 0% meaning banks need to hold none of your money in reserve.

What raising interest does is deflects attention away from the responsible parties by depressing the economy, by killing off demand. As usual the consumer ends up picking up the tab for the profligate spending of the producers of the currency. By removing excess liquidity from the system Government / The FED / Banks are forced to lend much more carefully, the interest rates would be set by the market, irresponsible/stupid ventures would be stopped in their tracks, companies existing on cheap interest loans would be removed and a more responsible corporate and lending structure would exist.

Precious metals are also purchased by many correct thinking investors as a hedge against inflation. They make investments during the course of a rate-hike cycle when the metals become relatively cheap, in anticipation of the potential increase in metals prices in the future.

The specter of hyperinflation drives citizens to invest in any assets which will preserve their buying power against their failing currency. Your currency only holds the value that it does because of your confidence that you will be able to spend it and receive like value from another party. When that confidence disintegrates, so does the value of the currency.

(Source 1 – Read the full article by Daniel Fisher)

The charts below show in both percentage terms and price terms the relationship between interest rates and gold.

I have included the Dow to Gold ratio into the weekly figures as it is an important indicator as to when to be invested in the stock market and when to be invested in Gold. The ratio is basically how many ounces of gold it takes to purchase the Dow Jones Industrial Index (now the Baha30 index). At extreme lows in 1980 the ratio was 1.29 ounces and 1933 it was 1.94 ounces. At the top of the market it was around 44 ounces to buy the index number. We are currently around 19 ozs to buy the index. I expect when all is said and done and all the excesses are removed from the market, that the ratio will be less than 1:1. As the stock market weakens it takes less gold to buy the index provided the gold price is not being manipulated.

Gold’s low of the week was $1,618.00 and the high was $1,669.00, now trading at around $1,619.00.

The monthly chart for Gold is negative. The possibility of $1,561.00 is still in play. The weekly chart is neutral showing signs of life. The daily chart is neutral but almost a buy.

The low for Silver this week was $18.85 and the high $20.05, trading around $18.93 at present.

Silver on the monthly chart is neutral with positive indications. On the weekly chart the buy signal almost immediately reversed to neutral and now looks more positive again. On the daily chart, we continue to have a buy signal.

On the Stockcharts.com charts, the blue vertical lines are our proprietary system buy signals and the red vertical lines are system sell signals – for information purposes only.

Please contact us to arrange the purchase and storage of your gold and silver requirements in a safe, insured, location outside of your jurisdiction.

This is my interpretation of the market and is not to be taken as financial advice. Before making any buy or sell decisions I recommend that you consult with your professional financial advisor.