Rising Interest Rates Not Nemesis Of Gold

  • Posted Monday, August 25, 2014 at 01:31 PM

Los Angeles CA, August 25 (Tangible Investments) - by James O’Dell - Gold and Silver prices ended mixed on Friday with Gold adding $4.80 or 0.38 percent to finish the week at $1,281.35 an ounce, after Fed Chair Janet Yellen, in her speech at the Kansas City Fed’s annual Jackson Hole Economic Symposium, stressed the need for caution before raising interest rates. Silver eased $0.02 or 0.10 percent to end the week at $19.45 an ounce, while the Gold/Silver ratio, the measure of the number of Silver ounces needed to buy an ounce of Gold, rose to 65.88.

The Fed has made it clear that it will wait a "considerable time" after its massive quantitative easing (QE) program ends in October, before raising rates. Financial markets currently speculate that a rate hike should occur by the middle of next year, but nothing is in stone. A few policymakers tried to make the case for an early boost in rates that have remained comfortably near zero for almost six years now.

"I'd rather see us start to raise rates earlier and try to go slow than to wait until the last minute," said Philadelphia Fed President Charles Plosser in an interview at the symposium. "Janet Yellen confirmed the majority view of the (Fed's policy committee): much more labor recovery is needed before the Fed raises policy rates," said David Kotok, of Cumberland Advisors.

Gold's slide last week was due in large part to mounting fears of looming interest rate hikes. The concern is that Gold will falter when the Fed begins normalizing interest rates, but history fails to bear out the fallacy that rising interest rates are a nemesis to Gold. The belief that Gold and rates have a strong negative correlation is untrue, and the proof is in the statistics. Gold’s correlation with 1 year and 10 year Treasury yields was recently just 27.5 percent and 25.9 percent respectively.

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