Soaring Interest Rates Bad for Gold Prices?
We have been seeing interest rates move higher, and this has been creating a lot of noise in the gold market. There’s a lot of concern that this trend could be very bad for gold prices.
Before I get into any details, do just this one thing: Don’t jump to conclusions based on the noise.
Let’s answer a few questions first.
By how much have interest rates increased? If we look at 10-year U.S. bonds, we’ll see that their yields have been soaring. In mid-2016, the yield on these bonds stood at 1.4%. Now, the yield is at 3.2%.
If you calculate the percentage change, you’ll see that yields have skyrocketed by almost 130% in a matter of a few years.
Why bother looking at the yields of 10-year U.S. bonds? Because those yields, one could say, are the benchmark for interest rates on loans. Mortgage rates are highly correlated with the yields on these bonds, business loan rates can be set according to this yield, and so on and so forth.
What does this have to do with gold prices though? You see, it’s perceived that higher interest rates are bad for gold prices. The idea is that gold doesn’t provide investors any yield, so investors are better off holding other assets.
Gold Prices Could Drop, But a Great Opportunity Could Be Developing
Now, let’s get into the details.
Here’s the thing: If you listen to the mainstream media, it will have you convinced that gold prices will drop. And let me tell you this: Gold prices may, in fact, drop a little.
Rising interest rates initially take a toll on gold investors’ sentiment.
How low could gold prices go? Across the board, we’re seeing the all-in production price per ounce at around $850.00–$1,000. So, if big speculators join forces, we could see gold prices drop to the production price.
Gold Prices Outlook: A Repeat of the Late 1970s Could Be in the Making
Now, you might be thinking, “Hold on, what are you trying to say?”
Dear reader, here is something that not many are talking about: Gold is actually a great opportunity in times of rising interest rates. It’s actually cheap.
Look at the chart below and pay close attention to the circled area. The black line represents the yields on 10-year U.S. bonds.
Chart courtesy of StockCharts.com
Notice something interesting? Look closely at what happened between 1974 and 1980. Initially, we had interest rates moving higher. This hurt gold prices. Between 1974 and 1976, gold prices dropped about 40%.
However, this changed and gold prices started to move higher, despite interest rates also moving higher.
I believe we could see something like that happening again. I, sadly, wasn’t around at that time (in the 1970s), but I have read about it as much as I could.
At that time, inflation was spiking, interest rates were soaring, and the global economy was in a shock.
These days, we know that interest rates are soaring, inflation is starting to move higher, and the global economy could be entering another period of shock (thanks to the ongoing trade war).
So gold could be a great opportunity.
I will end with this: Gold shouldn’t be something that investors dislike; it should be on their watch list, at the very least.