Prime Interest Rates and the Market Value of Gold

By: Greg Silberman | Thu, Aug 16, 2007
Print Email

Last week saw the Fed stand pat on rates and the Australian Reserve Bank increase prime interest rates by 0.25%. Stock markets remained nervous and exceptionally volatile.

The question foremost on investors minds is whether a turbulent stock market warrants halting interest rate increases or, in the case of the US, decreasing rates to resuscitate the Real Estate and credit markets.

Alas, the question is now resolved, central bankers in their wisdom have determined that growth trumps all and higher rates are warranted to combat price inflation.

That's the official line anyway!

It never ceases to amaze us that central bankers blame price inflation for increasing interest rates when in fact it is their own money printing that causes price levels to rise. The simple fact is that global printing presses have run too hard for too long for anyone to be able to prevent price levels from breaking out. This leaves jawboning and raising interest rate as the only effective tools in controlling the public perception on inflation. In other words, inflation is now baked in the cake and in the world of central banking (where perception is king) the blame is put on stronger than expected global growth.

Boil it down for us Greg. What does it all mean?

It means we are in for higher interest rates across the entire yield curve at exactly the WORST possible time:

Short Yields:


Chart 1 - Australia 1 month Bank Bill prime interest rates

The recent hike in interest rates by the Reserve Bank of Australia caused rates to break above previous support (red line) and painted a target of 8.25% (green line).

Australia has lead the charge on inflation because its economy is so sensitive to underlying commodity price pressures.

Long Yields:

Up until now the treasury market has been the major recipient of a flight to quality. But as chart 2 shows, Bonds are about to hit some headwinds as they approach support in the form of a long-term rising trend line.


Chart 2 - Bonds are approaching Long-term support (lower blue line)

The implications of the above chart is that long-term yields are about to reverse higher. There are 2 possible scenarios we could envisage which would cause Bonds to lose their safe haven status:

1 - The strong global growth scenario regains dominance, perceived market risk decreases and inflation has its way.

2 - The credit market contagion spreads into AAA paper and finally into treasuries causing the US Dollar to drop like a stone.

It seems improbable (to us at least) that scenario 1 will play out due to the extent of the credit market problems. Which leaves scenario 2 as our high probability outcome.

Needless to say, when the perfect storm hits gold and silver prices per ounce will soar!

More commentary and stock picks follow for subscribers...

 


 

Author: Greg Silberman

Greg Silberman CA(SA), CFA
www.goldandoilstocks.com

Greg Silberman

Profession: Research Analyst and Newsletter Editor
Company: Ritterband Investment Management LLC

Career Brief: Greg qualified as the youngest Chartered Accountant and Chartered Financial Analyst (CFA) in South Africa in 1998 at 25 years old. After completing his traineeship with Grant Thornton he moved to London where he worked for JP Morgan Chase in their Fixed Income Swaps Division. Sick of the grey skies and cold weather Greg relocated to Atlanta, Georgia where he spent the next 4 years freelancing as a management consultant. His targeted clients were fast growing mid size US based companies and he worked across many industries including credit cards, health insurance and energy trading. Greg has recently returned from Sydney Australia where he spent the last 2½ years working in Equity Derivative Structuring for Perpetual investments a major Australian Asset Management Company.

Greg has a passion for the markets and has been writing Greg's market newsletter for 2-years. A newsletter focused on metal and energy stocks and recently non-resource small caps listed in the US and Internationally.

This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Copyright © 2006-2008 Greg Silberman

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com