A little simplistic indeed. There are many other factors besides interest rates that impact gold prices...
FWIW that post was more about The XAU/Gold ratio being at a historic Low and that "gold stocks" were undervalued in relation to gold.
GOOD READ!!
Why gold may rise substantially with interest rates
Much has been said about gold and the lack of any bullish follow through in recent months. One can certainly make a case of why gold prices are headed lower. The usual suspects are often cited by most analysts:
Notion of rising interest rates
Improving economic data
Stronger U.S. Dollar index
Strong risk appetite
Equity markets continuing to make new all-time-highs
Lower crude oil prices
Etc, etc, etc….
The way that we see it, a very compelling case can be made for significantly higher gold prices even in an environment of rising interest rates. The fact of the matter is, that in years past the price of gold has actually risen with the fed funds rate. This goes against the main stream theory so prevalent out there that once rates begin to go up, gold is doomed…….
Here we will outline our case for gold prices rising with interest rates:
While what has happened in the past may not necessarily happen in the future, one cannot deny that the past can act as a good guide. With regard to the Fed funds rate, a great example is seen from 1971-1974. During this period, the Fed funds rate rose from five percent to 10 percent while the price of gold rose from $35 per ounce to about $200 per ounce. Coincidence? Maybe-but we doubt it….On the other hand, once the Fed funds rate fell back down to five percent in 1975, the price of gold dropped by about 50 percent. During the period from 1977 to 1980, the Fed funds rate jumped to more than 20 percent, and the price of gold reached the $850 level. The point here is that rising interest rates may actually present a great buying opportunity in gold.
Asset reallocation-As interest rates rise, the stock market will find its top, if not much sooner. The fact is that we are now seeing a bull market in its fifth year that may be tiring. Rising interest rates may give investors great reason to “ring the register” at this point following one of the most historic bull runs in history. As money is taken off the table, investors will search for alternative asset classes to put cash to work in. We believe that gold could benefit from this scenario. In fact, one cannot rule out the notion of a significant crash in equity prices at this point. Valuations seem very stretched and according to some very credible economists, we are headed for heartbreak as the Fed fueled bubble bursts. Such a scenario could also potentially drive buying in gold and precious metals.
Geopolitical risks-The current geopolitical landscape is a mess. It seems that every where one turns there is conflict whether it is in Ukraine, the Gaza Strip or Iraq. Unfortunately, many of these problems are not likely to go away any time soon. While gold has not thus far benefitted from the current tensions, we believe that any significant escalation could potentially drive gold higher. The world is a changing place with or without higher interest rates. With change comes uncertainty. With uncertainty comes the desire for certainty. We believe that gold may benefit as this uncertainty continues.
Gold is still in a long-term uptrend-The price of gold is still trending higher. Unfortunately, many investors cannot seem to see the forest through the trees, and only look at the here and now. The fact is that gold may be an excellent buy at current levels for the patient investor. In fact, gold may be an excellent buy at much lower levels. While everyone is talking about current near-term support in gold around the $1240 level, should this level not hold we could see $1000 gold. We believe gold prices at this level would drive buyers to load up.
Demand from India and China will increase-regardless of what interest rates do here in the U.S., demand from China and India is likely to continue to rise. We feel that Asian buying in gold will likely help support the metal for decades to come. In addition, we believe that more and more central banks will look to add to their gold reserves as currency markets become more erratic and uncertain. We believe that this central bank and Asian buying will help keep a floor under the yellow metal.
Inflation will likely rear its ugly head-at some point; we believe that inflation will pick up. This is interesting considering the fact that the Fed has tried and tried and tried to stoke inflation but has thus far failed. This is largely due to the fact that many of the dollars created by the Fed have not found their way into the economy but rather have been hoarded by banks. This money will at some point have to find its way into circulation, and when this flood of money hits then we may see inflation begin to really pick up. It may not be tomorrow, or next week, or next month, but we feel it is coming and when it does it will be significant. This could potentially fuel buying in gold as gold may act as a hedge against rising prices.
Of course, there are many other reasons gold and precious metals could rise along with interest rates. Here we have simply outlined a few to try and dispel the widespread notion that rising rates are an automatic death sentence for gold prices.
