Gold price vs Fed-controlled interest rate

rmpsrpms

My first post on PM forum...

I am not an economic genius, but I figure there should be a general movement of Au and Ag prices as the Fed tapers QE and eventually starts raising interest rates. Is this correct or are there other expected/correlated factors that will offset or more than offset these moves? Of course, barring any new wars, black swan events, etc.

Furthermore, I prefer physical PMs but again barring any unexpected events that would crater the ETF market, what drawbacks are there to ETF vs Physical?

Ray

derryb

Generally what's bad for the dollar is usually good for PM prices. Keep an eye on the dollar and what the future holds for its value.

Taper is generally not good for PM prices since anti-taper (QE) gives metal prices strength.

Rising interest rates should be good for PM prices as they will indicate FED action is not working. Rising interest rates are one of the FED's great fears, they are committed to indefinetly keeping them near zero (ZIRP). If they lose control of interest rates, they lose control of the economy. The market may just take control of rates away from them.

Metal ETFs are good for short term volatility plays but keep in mind that unlike physical metal they are paper promises. ETFs are a good way to trade metals in a retirement account without having to physically buy and add metal to the retirement account. Inverse ETFs give a great opportunity to short.

OPA

<< <i>My first post on PM forum...

I am not an economic genius, but I figure there should be a general movement of Au and Ag prices as the Fed tapers QE and eventually starts raising interest rates. Is this correct or are there other expected/correlated factors that will offset or more than offset these moves? Of course, barring any new wars, black swan events, etc.

Furthermore, I prefer physical PMs but again barring any unexpected events that would crater the ETF market, what drawbacks are there to ETF vs Physical?

Ray >>



Contrary to the conspiracy advocates, in my view PM's are just another commodity, subject to the swings of supply and demand. The market makers (speculators) in gold & silver took their gains in 2011 & departed for better "hunting grounds." Until they return, gold & silver will continue to trade in a narrow range. If you add that to derryb post, it will give you a decent perspective of gold and silver.

MGLICKER

Rising interest rates should be good for PM prices as they will indicate FED action is not working. Rising interest rates are one of the FED's great fears, they are committed to indefinetly keeping them near zero (ZIRP). If they lose control of interest rates, they lose control of the economy. The market may just take control of rates away from them.


Well said. To a degree this is already occurring. 10 year rates have jumped over 100 basis points in the last year, even with the Fed rapidly buying the notes. Bernanke has expressed his confusion over this. Much like Greenspan did when home prices collapsed.

Investing at below market return on long term paper rarely remains popular for long. Each full point of interest that the govt has to pay on $17T will add $170 to the deficit.

cohodk

First thing you have to understand is that the FED does not control interest rates.

TwoSides2aCoin

Simple. Same as it always was. Go make money. Who needs gold ? Nobody. That's why I buy it. Investors play the stock market and paper. Collectors collect. Stacker stack. Money makers make money doing what they do best. Growing it. Any old way you want brother.
It's YOUR dime and my two cents' worth.

derryb

<< <i>First thing you have to understand is that the FED does not control interest rates. >>


Then a Zero Interest Rate Policy is just another FED conspiracy theory. Through its open market operations (its trading desk) the FED currently controls interest rates with the buying and selling of government securities. It also has a great affect on interest rates by what interest it chooses to pay on excess reserves it holds on behalf of banks.

We would not be witnessing near zero percent interest rates if it were not a policy of the FED. There is no guarantee that the FED will always control interest rates. If things get far enough out of whack with reality, reality (the market) will take control of interest rates. This is most likely what keeps central bankers and economic engineers awake at night.

It is this belief that the market will eventually set interest rates and prices that propels the record sale of precious metals in the face of falling prices.

Baley

Rising interest rates should be good for PM prices as they will indicate FED action is not working

Huh? it was falling interest rates that partly fueled the bull market in gold, as investors searched for some kind of yield.

If interest rates go up, certainly some folks will sell their gold and buy less volatile, more guaranteed returns in money market funds and CDs, which currently pay essentially nothing

Higashiyama

With one small caveat, I definitely agree with Baley -- a moderate rising interest rate scenario should signal a return to normalcy and is certainly not positive for precious metals. Rising rates are likely to correlate with a stronger dollar and probably declining previous metals.

The one small caveat -- if rates were to rise very rapidly (which doesn't seem likely but certainly could happen), the Fed might get nervous and confuse things further with more easy money and buying of bonds, and this could rekindle some memories of inflation. So, while I agree with Cohodk's assertion that the Fed doesn't control interest rates, I think those of us who wake up at 3 AM worrying about such things could be concerned that they will muck things up trying to control them.

(if Cohodk would let Mr. Bernanke and Ms. Yellen know that they don't control interest rates, we might be better off. )

derryb

<< <i>Rising interest rates should be good for PM prices as they will indicate FED action is not working

Huh? it was falling interest rates that partly fueled the bull market in gold, as investors searched for some kind of yield.

If interest rates go up, certainly some folks will sell their gold and buy less volatile, more guaranteed returns in money market funds and CDs, which currently pay essentially nothing >>


rising interest rates in the face of a zero interest rate FED policy will indicate the market, and not the FED, is setting the rates. It will indicate that FED influence is weakening and will open the door to inflation and a rush out of dollars (that are losing buying power). Dollar weakness will equate to gold strength.

cohodk

Higashiyama, i think Ben and Janet both know their limitations. My fear would be that they dont. However, neither appears to have sufficient ego to interfere with rational judgment.

Derryb, ask yourself if perhaps ZIRP is actually keeping rates higher than otherwise might be.

derryb

<< <i>Derryb, ask yourself if perhaps ZIRP is actually keeping rates higher than otherwise might be. >>


How far below zero might they otherwise be? I look forward to the day I get paid to borrow money.

roadrunner

<< <i>First thing you have to understand is that the FED does not control interest rates. >>



Of course they don't. It's JPM, GS, Citi, BoA, and Morgan Stanley that set the rates with their $250 TRILL in otc interest rate derivatives. The FED and USTreasury only tell those guys when it's a "good" time to either buy
or sell those contracts. And if those banks follow instructions, they get an extra $3 TRILL in bank reserves to use as collateral in their prop trading margin as well as inside information on what the FED is cooking next.

When the $900 TRILL in otc interest rate swaps controlled by the world's TBTF banks no longer keep rates in a tight and acceptable range....then the game is up for the FED, Treasury, big banks, and you and I as well. Any
accounts, cash, and other assets you have in the financial "system" will be ripe for rehypothecation (ie covering bank's derivative losses).

So the "market" has maintained a near ZIRP lending policy for all these years now and not these derivatives?

derryb

Gold and interest rates

"investors should always analyze the whole economic context and examine whether the changes in the real interest rates are accompanied with weakening or strengthening of the US dollar and economy."