Adrian Ash

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 below? 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.

DR_Rates_030513

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?

Adrian Ash
for The Daily Reckoning

Gold price chart, no delay | Buy gold online at live prices

You May Also Like:


Investors to Silver: “Let’s Get Physical”

James Turk

The scramble for physical gold and silver is intensifying. People increasingly want to own the real thing, and not some paper substitute, all of which comes with counterparty risk. This conclusion is apparent from the fact that the futures prices for gold and silver have moved into “backwardation.”Allow me to explain…Because gold is money, gold […]

Adrian Ash

Formerly the City correspondent for The Daily Reckoning in London and head of editorial at Fleet Street Publications Ltd, the U.K.'s leading financial advisory for private investors. Adrian Ash is also the editor of Gold News and head of research at BullionVault. SPECIAL REPORT- The Endless PAYCHECK PORTFOLIO: In three simple steps, unleash a steady flow of work-free income... starting with up to 75 automatic "paychecks" deposited directly into your account.

Recent Articles

A Quarter-Century’s Conclusion on Our Cancer Woes

Ray Blanco

Breakthrough technologies can hold the most undiscovered money-making potential. What we’ve accomplished in a quarter century with cancer research could make you serious money and save countless lives. Ray Blanco has more on this ground breaking story...


Give Your Book Away For Free, Make More Money

Chris Campbell

The publishing industry is on its head. These days, it makes more sense to make money before you write your book and give it away for free once you do. In today’s Laissez Faire Today, Chris Campbell shows you how to create a hit with those two counterintuitive steps. Read on…


How to Poke the Russian Bear in 3 Easy Steps

Greg Guenthner

Interested in buying the dip in Russian stocks this morning? Before you do, let’s try to knock some sense into that skull of yours. Late last week, I reminded you why we bid farewell to the big Russian bear back over the summer. At the time, Russia was one of the cheapest markets in the world. But cheap can always get even cheaper—and Russia is certainly no exception. With comic book supervillain Vlad Putin manning the controls from his secret Siberian lair, the Market Vectors Russia ETF (NYSE:RSX) has dropped a cold 20% since registering its late June highs. Does it have a shot at rebounding? Greg Guenthner explains…


Why Malpractice from the Fed Will Undermine Growth

Steve Forbes

The latest friend of ours to weigh in on the topic of the value of your money is Steve Forbes. As you’ve been reading this week, we paid a visit to Mr. Forbes recently, to discuss his latest book, Money. In this essay, you’ll find his thoughts on currency devaluation… it’s impact of economic growth and your investments…