Gold Prices: Sinking On Interest Rate Hikes

Investors in the US woke up this morning to a rising US Dollar and falling gold prices.  The reason is simple enough:

Interest rates.

If a country is offering higher interest rates, and the perception is that the country’s economy is strong enough that payments can be made, lower-interest safe assets will be sold off and higher-paying (and probably higher-risk) investments will be bought.

The Fed’s two-pronged approach to the problems of 2008-9 are the reason why interest rates are currently rising.  The 2 prongs are the Fed’s QE programs and the Fed’s setting of the base interest rate.

The Fed’s QE programs achieved their initial goal of floating the US through a shaky period.  As warned by crusty old investors back then, the US markets found a way to funnel all that free money into profit-making things, like stocks. QE money didn’t really come from nowhere; it was created in the same way a mortgage by your local bank creates money.

Think back to your Econ 101 class, to that sunny Friday afternoon when you weren’t really paying attention, and the instructor droned through an explanation of Regulation Q.  Which, in case you were really asleep, talks about how the base inter-bank lending rate relates to current balance. The explanation of how it works out always ends with “and is paid off by money actually made in the future”.

And until you pay the money back, you have to pay interest.  Or in modern terms made popular by credit card programs, you only have to pay the monthly payment. 

Every once in a while someone will ask this Gold Enthusiast – who is in the Curmudgeon phase and on the edge of attaining Old Codger status – why there is anything wrong with this approach?  After all (the usually-young-and-innocent questioner asks) what’s wrong with just paying the monthly fee?

The problem is the same as why gold prices fell this morning.  Interest rates.

You see, no one really knows what the future brings. You never know when a vote results in Donald Trump becoming President.  (Just think – 2 years ago that would have been a good joke.) And you never know what interest rates are going to do.

When Ben Bernanke decided the QE programs were a good idea, interest rates were below long-term norms and sinking.  Interest rates at that time meant the QE programs were affordable. To Curmudgeons and Old Codgers, and the few who’ve attained the coveted Really Old Curmudgeon status, the markets being below long-term norms was a Big Red Flag.  Even a college freshman could predict with almost 100% certainty that interest rates would be higher in the future, as those monthly statements were rolling in. Some continue to say the QE programs were a bad idea from the start.

Which means the payments on the QE program would be larger in the future than they were back then.

 Related: This Market is SUFFOCATING Under New Taxes

About the author

Mike Hammer

Mike Hammer has had a wide-ranging career, with trading and investing as a continuing theme. Mike graduated from UC Berkeley with a business degree, then worked with Macy's in their operations arm. He left Macy's and spent a summer trading his own account, which taught him a lot about trading in general and markets in particular. Trading through the Black Monday and the Crash of 1987 showed him how most people are unprepared for upheavals in their trading. He then joined Waddell & Reed as a financial advisor, helping regular people understand their finances and meet their life goals.

Then came the usual story - Mike met and married the lady of his dreams. They moved to upstate New York, where Mike worked first for a small manufacturing consulting company, then Cornell University. While loving the work and the higher-education atmosphere, Mike missed the world of finance. Eventually, he signed up for stock trading coaching with the Adam Mesh Trading Group, to learn from people who understood modern markets. Within a year, Adam asked Mike to become a stock trading coach.

Since then, Mike has trained over 200 individuals, spoke at several national conventions, and is a frequent contributor to conference calls across the Adam Mesh community. Mike writes The Gold Enthusiast daily newsletter, runs the Golden Hammer trading service, and participates in the Mesh Private Portfolio. He also keeps a position in international education which keep him in touch with "the student mindset". Mike closely follows the gold, energy, and financial sectors. His motto is "Plan your trade, then trade your plan!"

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