We all have a tendency to listen to
statistics and formulae and believe that they drive the monetary system. This
starts on a false basis because these numbers are driven by more fundamental
realities. They should be the result of measured realities, but they can be
structured in a way that ignores some of the basics. Interest rates are not
just one item. It’s too general a term. There are a host of interest
rates even at basic levels that are the results of economic environments. Is
there a difference between interest rates rising to be less
‘negative’ and interest rates that turn from negative to positive
interest rates? There’s a world of difference. It’s the same with
inflation. Inflation that is less than growth is a very different animal to
inflation when there is no growth. It’s these differences which dictate
whether gold and silver are going to rise or fall in the future. We look at
some of these differences in this article and for subscribers plus the scene
that lies ahead. We also look at what relationship there is between gold and
silver and interest rates.
Why should gold and silver react
to interest rates?
Before 1970, gold was money to all and
sundry. Currencies were expressed in terms of their value against gold. In
1971 President Nixon and the I.M.F. sought to have gold cease to be a value
definer of currencies and in particular of the dollar. From the late
seventies currencies and their interest rates were separated from gold
values. The gold price was forced down to emphasize this point and to focus
the world’s attention solely on paper currencies [in particular the
dollar] as the world’s measure of value. Interest rates in a growing
developed world reflected economic conditions within a nation and ignored
their impact on exchange rates.
Since the turn of the century this
environment has evolved into one where interest rates directly impact
exchange rates. In turn, but at a slowing pace, gold prices reflected the
value of a currency plus its interest rate. From 2000 up to the first impact
of the ‘credit crunch’ gold has reflected the sum total of global
economic conditions as they pertain to gold. The impact of an individual
nation’s interest rate, including that of the U.S. has had a decreasing
influence on gold prices. Gold is now an internationally sought after,
financial-security-preserving asset that reflects no individual
nation’s currency value or interest rate.
The influence of the U.S. dollar or its
interest rates on gold prices has and will lessen. But this has not been
accepted in either the States or in the Eurozone.
It is felt there that the dollar is gold’s ultimate measure of value
and its interest rates a definer of gold’s value. Most developed world
commentator’s therefore believe that if U.S. interest rates rise, the gold price and by extension, silver prices, will
fall. To some extent [because of the lessening impact of U.S. and other developed
world investors] this will happen, producing smaller falls for a shorter
time. The bulk of global gold demand now does not chase gold prices nor react
to national interest rate changes. The influence of U.S. markets over
day-to-day prices of gold is still significant because investors there still
buy and sell quickly securing profits as their prime objective. The
‘buy-and-hold’ concept is like a tide in the sea, whereas U.S.
markets are the individual waves on the beach. The tide will always win out.
Initially the U.S. view will dominate, but over time the gold and silver
markets outside the U.S. will overwhelm U.S. market views. But under what
circumstances will interest rate rises cause gold and silver prices to fall?
The right conditions first
Before real interest rates appear,
certain internal economic conditions must change against both a global and
local economic backdrop Here’s why: -
- The Fed is watching the state of the
economy. Its current task is to ensure that the economy is neither deflating
nor inflating excessively, while attempting to stimulate growth. It is not to
ensure ‘price stability’ as was once the case. It is to place the
U.S. economy on a growth path that is self-sustaining. It’s having to do this against a background of the
slow, almost osmotic process of manufacturing moving out of the U.S. to the
east of the globe. U.S. manufacturing companies are leading this exit and
will continue to do so for the sake of profits. The Fed’s actions
ripple across the globe and, incredibly, impact Asia before they impact the
U.S. Why?
- Any stimulation of the economy in the
U.S. has to stimulate the economy at consumer level. Consumers now prefer the
goods they can afford, so favoring Asian imports above U.S. manufactured
goods. This process leads to a perpetual trade deficit, again favoring Asia.
Money paid overseas for goods, hurts the U.S. money supply and increases
dependence on foreign [primarily Asian] surplus nations to reinvest in the
U.S. That reinvestment does not go into the economy at consumer level. It
goes to the government.
- Originally quantitative easing was
aiming to stimulate the economy via the banking system then onto businesses
then onto the consumer to alleviate his problems. This has not happened even
after all this time. The housing market [which led the decline] is sinking
lower and lower still discouraging the consumer. Employment has failed to
rise to the extent that consumers feel safe in their jobs and have sufficient
disposable income to sustain a growing economy. Without a healthy consumer
the U.S. economy will not reach a strong recovery.
The cessation
of Q.E. and subsequent raising of interest rates
would be the result of the Fed believing that the economy is sufficiently
strong to warrant monetary tightening. It would also need to feel comfortable
that the banking system is not only sound, but also lending into the economy
as vigorously as it did before August 2007. It isn’t. Its focus is
certainly no on the consumer’s invigoration, but on profits, as always.
The disconnect between these two objectives is
rather like a person having a blood system that is failing to provide
sufficient blood to reach the outer capillaries on the body’s surface.
This has to happen for the economy to be healthy and capable of bearing up
under either tightening money supplies or rising interest rates.
Will the government or the Federal
Reserve lead the way?
No matter
what manipulation of money supply through QE [as we have seen in the last
three years] or interest rates, the Fed isn’t in control of the
economy. It can act as an accelerant or a brake but not as the motor itself.
The divided U.S. government is certainly not in a position to provide growth
or confidence, so sorely needed now, inside the U.S. or the globe. It remains
the consumer inside the U.S. that will decide the road forward for the
U.S. economy. He will respond to monetary and growth stimuli, if it is
effective, but he will always lead the way.
We feel for the Chairman of the Federal
Reserve because he knows this and needs the direct support of a synthesized
government to propel the consumer forward. The Fed can’t lead the way
by itself. The current emasculated government is incapable of providing the
stimuli that will truly resuscitate the U.S. economy. Its current actions
should be accepting its declining global role and perhaps taking action to
stem the flow of wealth and power eastwards. This requires certain
protectionist measures that may well conflict with the objectives of the
large U.S. companies [exporting production overseas] and capitalism itself.
How long will the U.S. uphold global capitalism as it leads to the seeping of
wealth and power from the U.S.?
Will interest rates be raised?
The reason
for raising interest rates that will bring gold and silver prices down, if
a global phenomenon would be to lower inflation in a healthy global
economy which could withstand rate hikes. Ideally, rising interest rates will
match the expansion of the money supply as the economy grows as has been a
constant picture in China for more than a decade now. This would allow money
itself to remain healthy. Positive ‘real’ interest rate promotes
savings and curtails spending. Should this happen, yes, gold and silver
prices will fall, because paper currencies will gain such a good reputation
for stability, value, excellent governance, while producing a real return
that is likely to persist for the foreseeable future. The housing market will
make a spectacular recovery, employment will rise rapidly and consumers will
feel confident enough in the future to again “live now, pay
later”.
If this
happens, you should expect to see a squadron of pigs circling the White House
in perfect formation.
Right now,
the U.S. recovery would be damaged with positive real interest rates. So
don’t expect ‘positive real’ interest rates for a very long
time.
The wrong
reason to raise interest rates would be to simply to
keep up with, but below rising inflation. If interest rates are less than
inflation they become ‘negative’ interest rates [as they are
now]. This gives deposits little value and lead to the depreciation of
deposits and savings. The intention is therefore to spur spending and
borrowing. It was hoped by the Fed that negative interest rates would have
left the recovery sufficiently stimulated to become self sustaining, but the
sight of the housing market going into a steep decline right now means that
this policy has failed so far and any interest rate hike, at all, is unlikely
to happen for a very long time. So no, we do not expect interest rates to be
raised for the right or the wrong reasons. In these circumstances rising
‘negative’ interest rates would lead to rising gold and
silver prices.
Continuously
failing stimulation measures, with rising inflation is the perfect formula
for failing confidence. Investors would flee from currencies to assets to
protect themselves from failing currencies.
Subscribe through www.GoldForecaster.com and
www.SilverForecaster.com
Julian D. W. Phillips
Gold/Silver
Forecaster – Global Watch
GoldForecaster.com
Is your wealth effectively structured to avoid the pernicious effects
of the regulatory climate that we have moved into? It should be and we can
help you to do so professionally and within the law. Please contact us for
any help regarding this at: gold-authenticmoney@iafrica.com.
Subscribers will be briefed again on this subject in our weekly
newsletter. For our regular weekly newsletter, please visit www.GoldForecaster.com
|