Interest rates and gold???

MoneyLA

Perhaps some of you are familiar with this and might be able to provide some info.

I am curious about what could happen to gold prices if interest rates should also rise dramatically because of a a threatened default by Uncle Sam??

I've always been under the impression that low interest rates help to fuel gold purchasing and investing. And I've always thought that once interest rates rose again, money would come out of gold and into investments that would track rising interest rates.

If there is a default, no one disputes that interet rates will shoot up. On the one hand, default would make gold more attractive. On the other hand, would gold sell off by foreigners seeking higher returns in interest rate assets?

Thanks.

roadrunner

If you look at what happened from 1977 to 1980 interest rates basically climbed for 2 years before they put the brakes on gold. And in that time the gold price basically tripled up and then some. In other words those rate increases were way too late and took a while to take effect. Whether we can afford to raise interest rates to a level above actual inflation (not CPI) remains to be seen. Per the SGS alternate CPI model (ie 1980 methodology) current CPI-U should be over 11%....the BLS claims it's around 3-4%. Rising rates could take some intial steam out of the gold price. But it would recover. It won't be until real rates are near positive that gold can be turned away. Right now that means rates up around 10%.

Even though rates could be rising due to an ever-increasing risk of default would you be willing to put your money into those bonds to earn those high rates? What if this were heading towards Weimar 2? At some point, no one would want to invest in such bonds no matter how high the interest rate became. At what interest rate would Zimbabwe bonds be attractive to investors, +50%, +100%, +1000%? I'm not saying that's what would happen to US Bonds but that rising rates in the mess that we currently have where banks are technically insolvent may not be the same "great deal" that could be had back in 1980-1981. The risk of world-wide currency defaults is far more credible today than it was in 1980. And the only reason interest rates remain this artificially low is because our top 25 banks carry $200 TRILL in highly leveraged otc interest rate contracts keeping them low. Such a mechanism didn't even exist back in 1980. And if rates are allowed to increase, those $200 TRILL in notional bets go kaboom. So until they find a way to wipe them all out by a stroke of the pen, the game remains the same. The return of one's money rather the return on one's money may be the most important thing in today's environment.

roadrunner

derryb

Gold and Interest Rates