Gold Quietly Emerging
Todd Stein & Steven McIntyre
The experts tell us not to fight the Fed. In an environment of rising rates, gold's good times are finished, so we are told. Indeed it is true that according to logic, holding gold and silver bullion should become less and less attractive as bond yields rise. But we believe that moving entirely out of gold and into paper bonds is just about the worst thing one can do with their savings at this time.
First, let's examine the argument that rising rates are detrimental for the price of gold. History tells us that this is not necessarily the case. During the late 1970s, the Fed Funds Rate tripled, yet gold went up five-fold in this timeframe. Such price action is clearly a case of rates playing catch-up with gold and other commodities, not the opposite as we are so often told. This catch-up phenomenon repeated itself in the 1980s and continues today. The Fed funds rate has doubled since gold hit its most recent high in November 2004, yet the yellow metal is less than 5% off this peak.
Still don't buy our argument? Are you unwavering in your view that gold and silver have inverse correlations to rates? Well then, we have good news for you. The rate increases, whatever you think their effects have been, could be about to end. Suppose the Fed will hike maybe one (September meeting) or two more times, just enough to make something in the economy "break", then they would likely cave under political pressure and bring the rate hikes to an abrupt stop. Perhaps the economy will break due to other factors (such as Hurricane Katrina), but when it happens, there is no way the politicians at the FOMC will continue to hike rates. Commodity and asset inflation is much more politically feasible than deflation.
Another reason why we see higher prices for gold is that governments are slowly moving out of the U.S. Dollar. China and Malaysia have already made headlines about removing their currencies' Dollar peg. But behind the scenes, many other countries such as South Korea and various Middle Eastern nations have expressed similar desires to diversify out of dollars and into other currencies and even gold. Additionally, China is encouraging its citizens to store some of their savings in the form of gold bullion. This is quite a contrast from the United States where citizens are bombarded with advertisements to spend or, if they want to save, stick their money into tech mutual funds. Throughout history, wise investors have always lived by the slogan, "follow the gold". Behind the scenes, gold is emerging and we would suggest to all subscribers to follow the gold.
Sep 08, 2005