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Gold and the Direction of Travel
By: Adrian Ash | Monday, March 4, 2013
Yes, the real rate of interest matters to gold. But not as much as its
direction...
Wall Street and the City are coming to decide that gold is a sell. Because
interest rates, they reason, are set to rise sooner than they used to imagine.
This professional money is only half-wrong. Central banks aren't about to
hike the returns on cash savings, which have been a wasting asset pretty much
non-stop since 2007.
But when the central banks do move to defend the real value of cash by hiking
rates - or stop beating up short-term rates so badly that longer-term rates
start to rise - gold is likely to suffer. Just so long as those hikes actually
outpace inflation. Because it's the direction of travel which matters, not
any particular level.
See the two fake-outs above? The first, in the mid-1970s, saw gold prices
halve in just 18 months, even though the real rate of interest stayed below
zero for much of that time.
And once the direction of travel in real interest rates turned around again, gold
prices began the second leg of their 1970s' bull market, rising 8-fold
between the end of 1976 and the start of 1980.
The second feint came in early 2009, when T-bond yields held steady but inflation
went negative on the official CPI index at least. The gold market didn't buy
for one second the idea that real rates would stay positive. The Fed wouldn't
allow it, gold buyers reasoned (whether they knew it or not). Which now looks
a smart call.
Since then, the very worst real rates were offered in September 2011, right
when the Dollar gold price hit its current peak of $1920 per ounce. Since then
real rates have crept higher. No, today's mere 0.4% might not sound like much.
But it's been enough to flatline the gold bull.
Do you think the Fed will now allow or reverse these above-zero debt costs
for the US Treasury?
Formerly City correspondent for The Daily Reckoning in London and head of
editorial at the UK's leading financial advisory for private investors, Adrian
Ash is the head of research at BullionVault,
where you can buy gold today vaulted
in Zurich on $3 spreads and 0.8% dealing fees.
About BullionVault
BullionVault is the secure, low-cost
gold and silver exchange for private investors. It enables you to buy and sell
professional-grade bullion at live prices online, storing your physical property
in market-accredited, non-bank vaults in London, New York and Zurich.
By February 2011, less than six years after launch, more than 21,000 people
from 97 countries used BullionVault,
owning well over 21 tonnes of physical gold (US$940m) and 140 tonnes of physical
silver (US$129m) as their outright property. There is no minimum investment
and users can deal as little as one gram at a time. Each user's unique holding
is proven, each day, by the public reconciliation of client property with formal
bullion-market bar lists.
BullionVault is a full member of
professional trade body the London Bullion Market Association (LBMA). Its innovative
online platform was recognized in 2009 by the UK's prestigious Queen's Awards
for Enterprise. In June 2010, the gold industry's key market-development body
the World Gold Council (www.gold.org) joined
with the internet and technology fund Augmentum Capital, which is backed by
the London listed Rothschild Investment Trust (RIT Capital Partners), in making
an $18.8 million (£12.5m) investment in the business.
Please Note: This article is to inform your thinking, not lead it.
Only you can decide the best place for your money, and any decision you make
will put your money at risk. Information or data included here may have already
been overtaken by events - and must be verified elsewhere - should you choose
to act on it.
