Late last year the Federal Reserve announced its decision to taper its asset purchases, then to accelerate the pace of that tapering. That will bring the expansion of the Fed’s balance sheet to an end this year, possibly as early as March. The expectation then is that the Fed will then begin to hike its target federal funds rate.
Markets are expecting at least three to four interest rate hikes this year from the Fed, while JPMorgan CEO Jamie Dimon has said that he expects six to seven hikes. Whether there’s enough time in the year to make that many hikes is debatable, as it can take time for markets to absorb the impact of each hike. But make no mistake, hikes are likely coming.
The conventional wisdom has always been that rate hikes are bad for gold. That’s due to the belief that rising bond yields will make interest-yielding investments more attractive to investors, and thus they’ll rotate out of non-yielding assets like gold and into higher-yielding assets like bonds.
But there’s little data to actually prove that there’s a correlation between higher interest rates and weakness in the gold market. And with the current interest rate and inflation environment, there’s every reason to believe that higher interest rates not only won’t harm the gold price, but they could also end up being bullish for gold.
Rising Inflation Confounds Conventional Wisdom
The fact that inflation is high and rising is throwing a lot of conventional wisdom on its head. Let’s assume that the Fed is able to make six interest rate hikes this year. That would most likely put the federal funds rate at 1.50-1.75% by the end of the year. That’s still considered a low interest rate by most standards.
It also is important to note that nominal interest rates in this case are less important than real interest rates. If inflation remains at 7% for the rest of the year, or even rises, then the real federal funds rate will remain negative. A 1.75% nominal federal funds rate and a 7% inflation rate means that the real federal funds rate is -5.25%.
Negative interest rates have never been believed to be harmful to the gold market. In fact, most people would speculate that negative interest rates would be a boost to gold prices, as it indicates that monetary policy is still loose, and thus conditions are favorable to precious metals.
Other Effects of Higher Interest Rates
One of the other possible effects of higher interest rates could be to puncture the massive debt bubble that has grown since 2008. Total corporate debt levels in the US have grown over 70% since their last peak in 2008, and are nearly double their post-2008 low.
This massive corporate debt bubble has been assisted by interest rates that remained too low for too long. Corporations have been able to take advantage of those low interest rates to issue more and more debt, some of it to buy back shares, some of it to fund operations. But there’s no indication that much of that debt will be paid back.
If interest rates were to rise significantly, the ability of many companies to roll over the debt they’ve already issued could be put into doubt. There will undoubtedly be defaults on the part of marginal borrowers, with the risk that, like the 2008 collapse of the housing bubble, a default on the part of one company could start a cascading series of defaults that could threaten the entire bond market and even the entire financial system.
So rather than boosting demand for bonds, a rise in interest rates could depress demand for bonds because it would expose the underlying weakness of bond markets. Bond markets could freeze for some period of time, and bond investors could decide to flee bonds for the safety of gold.
Remember too that the last time inflation was this high, 40 years ago, the federal funds rate was over 11%. Today the federal funds rate is zero, and even an increase to 1.75% wouldn’t be anywhere close to historical levels consistent with current levels of inflation, let alone anywhere close to pushing real interest rates into positive territory. In other words, the only way that rate hikes could really negatively affect gold is if the Fed were to raise rates to levels that it won’t be able to hit without collapsing the economy.
Is Now the Time to Buy Gold?
Right now the conditions are right for gold to start seeing significant future growth. Rising inflation, continuing loose monetary policy, and a weakening economy are among the driving factors that should continue to keep gold elevated. And a worsening economy should mean more demand for gold, which should boost the price.
Currently we’re still in a waiting period, waiting to see just when the downward spiral will start. Stock markets appear to have topped out, gold has traded in a narrow range for a while, and investors of all stripes are biding their time, trying to get a sense of what comes next.
Many investors have already made the decision to try to protect their wealth against a future crisis by buying gold and silver. Gold and silver have a long history of maintaining their value and even gaining value during times of economic crisis and financial turmoil.
During the 1970s stagflation, gold grew at an average annualized rate of over 30% per year. And in the aftermath of the 2008 financial crisis, it nearly tripled in price while stock markets struggled to regain their pre-crisis levels.
If gold grows in the 2020s even a fraction of the amount it did during the 1970s, many gold owners would end up very happy. And with rising inflation and a Federal Reserve that doesn’t seem to know when to stop creating money, there’s a very good chance that the 2020s could end up being a golden decade for gold.
If you’d like to take advantage of the potential for gold to rise in price, you can add gold to your portfolio too. Doing so has never been easier. If you have retirement savings in a 401(k), IRA, 403(b), TSP, or similar account, you can use your existing retirement assets to open a gold IRA. A gold IRA offers you the opportunity to invest in physical gold and silver coins or bars while still enjoying the same tax advantages as your current retirement accounts. And you can roll over or transfer your existing retirement assets into a gold IRA tax-free.
But the time to protect your wealth is before inflation takes a bite out of your savings, and before the next crisis hits. If you wait too long, you risk losing money to an economic downturn or to runaway inflation.
Don’t leave your retirement savings at risk any longer than you have to. Call the precious metals experts at Goldco today to learn more about how gold and silver can help safeguard your assets.