Case for Higher Gold Prices Continues to Get Stronger
There’s something very interesting happening with gold prices these days—something that hasn’t happened in the last 10 years or so (at least). Gold bugs shouldn’t ignore it whatsoever. It could be hinting at a giant move ahead in the price of the yellow precious metal.
Back to basics first: in the investing community, there’s a prevailing opinion that in times of higher interest rates, gold is a bad investment. In a higher-interest-rate environment, the price of gold tends to fall.
Take a look at the below chart. It plots gold prices (golden line) and the yields of 10-year U.S. Treasuries as an indicator of interest rates (green line).
The chart shows three instances since late 2012 when the usual investing wisdom worked out. In 2013, as interest rates were expected to increase, gold prices fell. At the time, the Federal Reserve was hinting that it would raise interest rates and cut back on its money-printing. In anticipation, investors ditched gold.
Gold prices dropped significantly until 2015. Between 2013 and 2015, gold was one of the most hated investments. Big banks and famous personalities called the metal a “pet rock,” a “bubble,” and a “slam dunk sell.”
Then, in 2016, as interest rates started to move higher, the price of gold peaked a little. Fast-forward to 2018 and interest rates started to move higher while precious metal prices took a beating.
Chart courtesy of StockCharts.com
Something Changed in Gold Market in 2020
Something really changed in 2020. As interest rates bottomed, gold prices peaked. This was understandable and normal, but as interest rates continued to move higher, the price of gold didn’t move lower.
Look again at the chart above. Recently, gold and interest rates have been moving in the same direction. This is something we haven’t really seen in at least the past 10 years.
Also worth noting, the Federal Reserve has made it very clear that it will be raising interest rates and reducing its balance sheet at a much faster rate than previously expected. This should’ve been an extremely bearish development for the yellow precious metal.
Where Are Gold Prices Headed Next?
Dear reader, I believe that the gold market is filled with buyers these days.
Over the past few months, gold price levels around $1,800—and then $1,900—have been defended really well. Each time gold prices have dropped below these levels, buyers have come in and taken them higher. Interest rates don’t really matter to gold buyers anymore.
My stand on gold is as bullish as ever. If higher interest rates haven’t been able to take gold prices lower, it tells me there’s a strong base being built at the current price. I continue to think the move to the upside isn’t done just yet, and that $3,000/ounce gold could become a reality much sooner than expected.
Also interesting: big banks have been relatively bullish on gold these days. One would expect them to be extremely bearish on gold as interest rates increase.
Where’s the opportunity? I believe gold bugs should pay attention to gold miners. Over the past few years, gold mining companies have really improved their operations. If gold prices move higher, mining companies will be flooded with cash and their incomes will soar. Obviously, this will be reflected in their stock prices, so investors who own gold miner stocks could enjoy hefty gains.