Why an Interest Rate Hike Won’t Pop the “Gold Bubble”

11/24/09 Stockholm, Sweden – Here at The Daily Reckoning we tend to be of the mind that gold is in a genuine bull market, one that began about 10 years ago. It may have its moments of frothiness or corrections along the way, but it’s still trending upward. Needless to say there are those that disagree, and who believe gold is part of a forming asset bubble. The Daily Gold takes this “gold bubble” perspective to task for several reasons.

For starters, “it is real interest rates that matter. Rates need to be 2-3% above the level of inflation.” Basically, in order for an interest rate hike to make a difference, and to have an impact on the gold price once inflation is accounted for, rates would have to go up much higher than seems plausible given the current high and rising unemployment.

Also important, “most people expect the US$ to lose value. If it loses 5% a year and inflation is 2-3%, then rates really need to be 10% to poke the bull in gold.” So, in this respect it could be difficult to spur investors to choose a weakening dollar, with a mediocre interest rate, over potentially constant or steadily increasing value in gold relative to the dollar.

You can read more details in The Daily Gold’s post on the interest rate argument against gold.

Rocky Vega

Rocky Vega is a regular contributor to The Daily Reckoning. Previously, he was founding publisher of UrbanTurf and RFID Update, which he operated from Brazil, Chile, and Puerto Rico, and associate publisher of FierceFinance. He specialized in direct marketing at MBI, facilitated MIT Sloan School of Management programs, and has been featured on CBS. Vega graduated with honors from Harvard University, where he was on the board of Let’s Go Publications and directed business programs involving McKinsey, Goldman Sachs, and Harvard Business School faculty. He is also enrolled at the Stockholm School of Economics.

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