Friday, April 08, 2016

Interest Rates & Gold
GoldMoney's Alasdair Macleod provides a very insightful & brilliant analysis on the relationship between gold & interest rates, dispelling several myths on traditional views of the relationship - it is commonly assumed that the gold price & interest rates move in opposite directions .. Macleod references what happened in the 1970s for some guidance, particularly with some emerging similarities with that timeframe as is being seen - stagflation in the economy .. the above chart shows how the rise in gold prices can still happen with a rise in interest rates .. "The dynamics behind the gold market are however different now from the early seventies. Debt levels today are so high they risk destabilizing the whole financial system, making it impossible for the Fed to raise interest rates much without causing a financial wipe-out. Asian governments, such as the Chinese and the Russians are known to have been accumulating strategic positions in physical gold, and the Chinese and Indian populations along with other Asian people have also exhibited notable appetites for physical metal. Instead of starting from a position where the U.S. Treasury on its own in 1969 still held 14% of estimated above-ground stocks, its holding is officially at less than 5% of them today. That is, if you believe it still has the stated 8,134 tonnes. This time, the gold price is likely to be driven by physical shortages in the old world, as American and European investors wake up to stagflation, their central bank's interest rate dilemma, and the loss of physical liquidity from their vaults. Today's market set-up, particularly if Chinese demand for energy and commodities materializes in accordance with her new five-year plan, looks like replicating the early stage of Phase 2 in the introductory chart to this article. Gold increased fivefold from $42 to a high of about $200 in three years. The circumstances today have notable differences, not least the launch-pad of negative interest rates. But we can begin to see why, despite the near infinite growth of derivatives as a price-control mechanism, it could be mistaken to assume that the link between interest rates and gold is normally one of non-correlation, and will continue to be so."
LINK HERE to the analysis

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