Rising Interest Rates Don’t Necessarily Spell Doom for Gold and Silver

Conventional wisdom tells us Federal Reserve monetary tightening is bad for precious metals. Analysts typically assume rising interest rates and a strengthening dollar will suppress gold prices. The Federal Reserve has raised interest rates twice in the last four months and has hinted at as many as three more hikes in 2017. While the economic environment and the Fed’s commitment to “data dependent” decision making doesn’t seem to support this trend of tightening, the central bank’s actions have dampened some of the enthusiasm for gold and silver.

But as Investment Strategy: ETF Securities director Maxwell Gold pointed out during a recent interview, this isn’t always the case. Historically, there are periods in which gold and the dollar simultaneously move higher.

This generally happens during periods of turmoil when the demand for safe haven is high. Gold explains:

“We’ve seen some periods when the dollar and gold actually move in sync. A great example is during another tightening period by the Fed between 2004 and 2006 when we saw a rise in the dollar in sync with a rise in gold.”

With political uncertainty in Europe, rising nationalism, the EU’s shaky future, and questions about how the Trump administration will play out, there is certainly plenty of turmoil to drive investors to safe havens.

Gold said it’s important to focus on the Federal Reserve rate while also considering the real interest rate.

“When people think of rates, they look at the 10-year rate, the US Treasury rate, and what’s important really for gold, and what drives that is a real interest rate. So taking that nominal rate measure and stripping out the rate of inflation. And certainly we see those real rates remain low and negative on a 2-year and 5-year basis. Even on 10-year bases, real rates are only at about 4%, and historically, gold performs positively, on average, going back to 1976 when real interest rates are below 2%, so certainly more room to run, particularly with rising inflation.”

Gold is also bullish on silver.

“I think silver has a lot further upside potential, driven primarily by its industrial applications … When you take into account the rise of industrial production, increase in manufacturing, rise of trade, that should be a boost for silver.”