We are hearing more and more about interest rates getting ready to rise. The Federal Reserve itself has said it expects the federal funds rate to increase to 1.5% by the end of next year and to 2.25% by the end of 2016.
Before the Fed came out with its forecast, I was writing about how the Fed will have no choice but to raise interest rates because inflation is rising too quickly.
And I have been reading what clueless reporters and analysts are writing about how gold bullion prices don’t perform well in a high interest rates environment. I want to set the record straight for my readers.
Shattering the myth about the high interest rates, today’s rates are still very low compared to the historical average. In the chart below, you will see the changes in the Federal Reserve’s federal funds rate since 1980.
Chart courtesy of www.StockCharts.com
Over the past five years, the benchmark interest rate set by the Federal Reserve has all but collapsed to zero. Moving rates to 2.25% by 2016 will have a significant impact on the economy. But at 2.25%, over the long-term, it’s still a very low rate. Prior to the financial crisis of 2008 and 2009, the federal funds rate stood above five percent.
Bringing it back to gold bullion, if you are old like me and remember the early 1980s when interests were very high, you will also remember gold bullion was trading at a then-record high of more than $800.00 an ounce, or about $2,500 in 2014 dollars.
The higher interest rates went then, the higher gold bullion went. That’s because interest rates usually rise to cool inflation. And with the rising inflation and higher interest rates we have ahead—gold bullion will love them both!
While there are fears over the Federal Reserve saying it will raise rates, other central banks like the European Central Bank (ECB) are working on keeping interest rates low, even going negative with rates. The conditions in the eurozone, despite what you read in the media, and as I have been warning, are much worse than they appear.
France, the second-biggest economy in the common currency area, has been in a severe economic slowdown. In June, the country’s manufacturing showed contraction again, with its Flash Manufacturing Purchasing Managers’ Index declining to 48, down from 49.3 in May. (Source: Markit, June 23, 2014.) Any reading below 50 on the PMI suggests contraction in the manufacturing sector.
With the ECB most likely to be forced to print money and buy bonds (just like the U.S. and Japan did), the situation is only more bullish for gold bullion.
I continue with the opinion that the gold miners are providing investors with the biggest bang for their buck right now. If gold bullion prices go to the level I expect them to hit ($2,500 to $3,000 an ounce), then these miners will easily be worth ten times what they are worth now.