Tag Archives: higher interest rates

Over the last 14 years, house prices in Canada have increased by 150%, twice as fast as in the U.S...[and] far outpacing household incomes. Any increase in interest rates would prick the bubble, and its implosion would trigger all sorts of mayhem to the point that the Canadian government has expressed concerned that such an event would be a significant risk to the "stability of the financial system".

We are at an interesting and perhaps critical juncture with respect to the direction of the gold price as it approaches a key support level. There are many mixed signals out there and the market seems to be vacillating, frustrating both bulls and the bears. Let us look at both cases in order to try to understand what the gold market may have in store for us during the coming weeks and months.

The central bankers of the world have painted themselves into corner. Growing mountain of debt makes it harder for economies to grow at higher interest rates, hence forcing central banks into a downward spiral of record low rates and monetary stimulus that simply encourages more borrowing and worsening the underlying problem - what the BIS calls "a debt trap"

The Fed and the bond market are responding appropriately to declining risk aversion and a somewhat improved economic outlook. There is no reason to fear the end of QE or the beginning of higher short-term interest rates. Let me explain further.

A temporary period of deflation will result from the end of the Fed's massive asset purchases followed by a period of inflation that will make the '70s seem like an era of hard money. Here's why.

Investors commonly assume that rising interest rates adversely impact the gold price, and vise versa. They believe that a rising interest rate environment is indicative of a strong economy, which is supposed to drive investors out of gold and into the stock market. They further assume that investors will want to exchange their gold, which has no yield, for stocks and bonds, both of which have yields and generate income but this intuition is unfounded. Let me explain why that is the case ans why, as such, gold investors shouldn't fear rising interest rates.

Should the Fed raise interest rates at some point in the future, as is widely expected, such higher interest rates might bring far worse consequences than can be achieved by simply staying the course. While some small, even token, rate hike would be tolerable, a return to historical norms could reap consequences in the general economy far beyond the direct effect on the federal government’s fiscal status. The fact is that the federal government is ensnared in a debt and interest rate trap of its own making from which it will be difficult to extricate itself.

Though the stock, bond and currency markets, at the moment, are preoccupied with the question of when the first interest-rate increase will happen, the real story lies in where interest rates are ultimately headed because that answer defines where stock, bond and currency prices are ultimately headed and the reality, dear reader, is that the Fed simply cannot — and will not — allow interest rates to crawl very high. Why is that you ask? Read on!

With all of the things in the world to worry about, how much should we worry about a sudden sharp increase in UST yields? The short answer is not much and here is why.

Interest rates cannot stay low forever so, while the Fed’s low interest rate policy is pushing stock and bond prices higher, it is also infusing potential energy into the gold market. Therefore, it is only a matter of “When?” and not “If?” this trend reverses and gold catapults higher.