Gold, silver and interest rates
I am tired to hear all this nonsense about gold and by extension silver. Gold is in bubble, gold does not have intrinsic value. That I heard just recently from some CFP and CRPC financial advisor with Merrill Lynch Wealth Management. But my favourite right now is this one - once the Fed starts raising interest rates, gold and silver are finished. Funny thing is, when I ask to explain why, he or she has no clue, just mumbles something rather incoherent, along the lines that higher interest rates will strongly support the US dollar and drive people out of gold.
Then there are other interest rate worries. Those are coming from China, which is one of the top gold buyers in the world. The conventional thinking is that China will raise interest rates to cool the economy and budding inflation. And that is very negative for gold and silver. Ya, right.
All this is going on when our lawmakers must soon consider raising national debt ceiling much higher. Currently, the US government debt is at an all time high, some mind boggling $14 trillions which amounts to $45,300 for each and everyone in the country. Yes, including you. So how much more do you think the government can borrow? Pretty much as much as it wants, so expect much higher number of trillions, unless Republican Congress tries to block it. Why the debt is so important will become very clear. And also will that higher interest rates are very bullish for gold and silver.
Now, as I wrote over a year ago in Fed to stop buying mortgages, interest rates, home values and swine flu pandemic, I stated that there is no way the government would allow interest rates to rise. And I have been right. Higher interest rates mean the end of recovery. If there is a recovery. I still don't see it. Now to the main topic, why high interest rates are very bullish for gold.
Every now and then, someone tells me about Paul Volcker. The man who broke inflation and ruined gold prices. I heard all about gold going to be done with very soon when he was appointed to head Obama's Economic Recovery Advisory Board. What you need to understand is that the situation is completely different today than in 1980s. Gold price did not spike, it has been in secular bull market for the last 10 years. This is not comparable with either, stock market bubble in whatever 2000 year it was, or recent housing bubble. Both bubbles had prices spike dramatically within a few short years. Gold price has totally different and much more solid growth. And by the way, where is Paul Volcker today?
The gold haters use dogma of rising interest rates as a way to dismiss gold and silver. These people either, mistakenly think that they completely missed the boat and jealous, or simply don't want to understand what gold is all about, and this category includes many financial advisers like the one I mentioned in the beginning, and even greater number of stock market amateurs who almost universally end up wiped out financially in the end. What is happening today has very little to do with the parameters of the past. As I pointed, government debt has increased substantially in the last few years. Very important to understand that this debt and the debt of the last 10 years has been serviced at historically low interest rates. When interest rates were higher in the 1980s and 90s, the overall debt load was much, much lower. So the interest costs have been way less than we can expect in the long term.
What is more dangerous yet very bullish for gold is the simple fact that the cost of debt will skyrocket if and when interest rates will rise only marginally. So with $14 trillions in debt, every 1.0% rise in interest rates mathematically equates to an extra $140 billion in interest payments. And do you know what the government took in tax revenue in 2010? Less than puny $2.4 trillions. Obviously, if the interest rates continue to rise for some time, we are going to have an inflation that will be of truly historic proportions, just like that winter storm that dumped over 3 feet of snow on my back yard last night here in Chicago.
A very bad case indeed. To eliminate such a bleak scenario, the Fed will keep on printing and monetizing more and more to keep rates low. That is very bullish for gold and silver.
Wed Feb 2, 2011 10:02PM | Copyright: www.bad-credit-advisor.com | More in Gold Investing | Comments (0)
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