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Gold and Rising Interest Rates: Selling the Rumor, Buying the Fact

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The Federal Reserve is widely expected to nudge interest rates up again this week. Most analysts agree that the specter of a rate hike is one of the primary reasons gold has slumped over the last several weeks. But are rising interests rates really bad for gold?

The short answer is no. At least not historically

Conventional wisdom holds that tighter monetary policy tends to increase bond yields and boost earnings. That makes and bonds more appealing to investors, theoretically lowering the appeal of gold and silver. So, when the Fed starts talking rake hikes, the air generally comes out of the precious metals markets.

But consider this: the Fed started raising interest rates two years ago. With the rate a full 100 basis points higher than it was in December 2015, gold is trading at nearly $200 per ounce higher than it was then. That’s more than a 15% increase.

As a recent Bloomberg article pointed out, when it comes to rate hikes and gold, the reality tends to be sell the rumor, buy the fact.

Chart gold against US 10-year Treasury yields and it looks distinctly like the metal tends to sell the rumor of rate rises, and buy the fact. Every time yields have peaked north of 2.5% over the past five years, gold has promptly rallied. Economists predict that yield barrier should be broken sometime in the first quarter of 2018.”

Last summer, Peter Schiff explained why the current rising rate environment is good for gold despite the conventional wisdom.

Central banks use two primary rationales to justify rate hikes – strong economic growth and a healthy inflation rate. As Peter explained, inflation is key when it comes to gold.

Rising interest rates are not negative for gold. I mean, the main reason that interest rates are rising around the world is because inflation is picking up around the world. Higher inflation is positive for gold. I mean, it is the most bullish thing for gold. And in fact, when inflation rates are rising, that means money is buying less, right? The purchasing power of money is going down. And that’s when you want to own gold.”

And while higher rates do boost bond yields, inflation is not a friend of the bond market. Bonds lose value as inflation increases. That is bullish for gold because gold is something you would own as an alternative to bonds.

A bear market in bonds is bullish for gold. But for some reason everybody just thinks, well, if interest rates are going up, that just makes gold less attractive because you’re giving up the opportunity cost. It makes bonds less attractive, because bonds are falling in value. It makes currency less attractive because interest rates are rising because currency is losing value. But gold won’t be losing value. Gold is going to be storing value.”

Right now, most investors are ignoring the yellow metal, but this might actually be an opportune time to buy gold. As we said last week, with the price relatively low right now, gold may well be giving you an early Christmas present.

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