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Home Topics in Depth Economics Rising interest rates AND rising gold prices?

  • PiedPiper (1188 posts)
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    Rising interest rates AND rising gold prices?

    …equals volatility.  But WHAT is the cause of this phenomenon?

    Rising gold, interest rates could spell trouble

    …What could spook the markets and cause market turbulence to shoot higher? The answer? A long period in which the price of gold and long-term interest rates rise at the same time, warns Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch.

    “Watch for the combo of rising yields and rising gold prices to signal impending market volatility,” he told clients in a report. Both the 1973-74 bear market and the 1987 Black Monday (market crash) were “preceded by three quarters (or roughly nine months) of rising bond yields and rising gold,” Hartnett noted.



    Why a Rising Gold Price is Bad News

    We have written about our concern that high annual deficits and accumulating public debt will lead to higher mortgage rates and to higher interest rates in general, burdening future generations with the interest cost and jeopardizing the country’s credit rating, continuing to burden economic growth, and adversely impacting employment. The Fed has temporarily countered the interest rate risk by artificially keeping interest rates low by inflatiing the money supply, thus discouraging savings and investment, causing long-term misallocation of resources, and leading to higher commodity prices and living expenses down the road. This note explains why a rising gold price is bad news.

    To compensate for sluggish economic activity and high unemployment, the Fed has undertaken a series of rounds of “quantitative easing”; that is, injecting huge amounts of liquidity into the marketplace by buying Treasury bonds and mortgage-backed securities, with the purpose of holding interest rates down and encouraging banks to lend to businesses.

    But many businesses are not interested in borrowing to finance expansion, given the difficult economic situation. They are concerned that consumers are paying down debt rather than spending, are burdened by ever more regulation, and are unsettled by temporarily extended and unknown future tax rates on income, capital gains, dividends and estates. Add in the higher costs of employment benefits — particularly health care insurance costs — and you have an economic environment in which established businesses have no incentive to expand and entrepreneurs are not keen to take the risk of starting new businesses.

    So the Fed’s activities result in increasing quantities of money being added to banking reserves, which finds its way into the stock and bond markets and fuels fears of future price inflation. Investors’ fears of inflation have sent gold prices skyward. Who wants to hold dollars that shrink in value daily?

    Trouble ahead

    Unfortunately, a rising gold price signifies trouble ahead. It’s a kind of canary in a coal mine. As more individuals become concerned that their dollars will buy less in the future and exchange them for hard assets, commodity prices such as food and fuel and metals and building materials will continue to rise. Foreign central banks that hold large quantities of depreciating dollar-denominated debt will demand higher interest rates to compensate for their loss in value or will swap out of dollars to buy gold, and the gold price will continue under upward pressure, while the value of the dollar declines.

    This is a long-term viscious cycle. If it is allowed to continue, dollar holders will lose faith in the currency, eventualy resulting in a situation where no one is willing to hold dollars at all. This is hyperinflation.




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  • westerebus (165 posts)
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    1. We are back in the inflation cycle.

    Having left the deflation cycle, barely. The capitol pumping managed to put the stock market up to new highs without much change to the fundamentals to support that rise.  The quandary of where to put one’s money was answered in one phrase: do not fight the FED.

    With wages depressed and the largest segment of workforce retiring, borrowing even at very low rates isn’t fueling the inflation fire to a degree that would cause the economy to expand as it had in the past.

    The talk of the National debt from the current administration is, well, there isn’t any. Proclamations of making America great again have yet to produce any thing. No infrastructure bill. No jobs bill. The freeing of banks to return to looting the Treasury and mining companies to pollute with impunity, does not a strong economy make.

    Can’t wait to see the revisions to the tax code. The Trumps will certainly take care of themselves and their fellow  penthouse dwellers.


  • Art from Ark (3190 posts)
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    2. Hyperbolic ballyhoo

    Where was the hyperinflation when gold was $1900 an ounce, that is, nearly $700 higher than it is now?

    The rise in gold prices in 1973-74 was in large part a reflection of the Energy Crisis, as well as the result of the complete debasement of the US dollar, which began in 1965 and culminated in 1971. The rising gold prices of 1979-80 were also partially the result of another Energy Crisis (which helped to fuel inflation), as well as the Iranian Hostage Crisis and a general sense of “malaise” in that period.



    The last time America was run like a business, we ended up with a Great Depression.
  • FanBoy (7983 posts)
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    3. this is inchoate — we need to pay down national debt but not consumer debt

    consumers need to spend spend spend


    inflation is being caused by too much money AT THE TOP

    global money is bidding up prices on all tangible assets particularly land, resources, commodities, and stocks/bonds and they want the peons to foot the bill

  • FanBoy (7983 posts)
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    4. "Stop with the doom and gloom…"

    If, as conservatives fear, the Chinese tried to bankrupt us by cashing in all their treasury bonds. We could simply print the money and pay them. Not a problem. And no, the high debt is not harming our credit. If you have bad credit, people will only loan you money at a high interest rate. Everyone in the world is willing to loan Uncle Sam money at almost zero interest. He’s got absolutely the best credit rating in the world.
    The supply-siders keep saying tax cuts will cause so much economic growth that it will reduce the debt. And it keeps not working. But they’re half right. It has long been know that tax cuts can stimulate the economy, especially in a recession. Here’s how that works.  Say the government reduces taxes by $1 billion per year, but does not fire anyone and does not stop buying anything. Then no one that sells to or works for the government loses their job. But taxpayers have an extra $1 billion in their pockets and they spend most of it. Businesses sell more and so they hire more workers.

    But how can the government keep spending without that $1 billion in taxes? Simple, they borrow the $1 billion. So yes, tax cuts cause growth and INCREASE the debt, if the government keeps spending. And that’s what’s been happening.

    So a tax cut that creates debt is a good thing in a recession. In fact you could cut everyone’s taxes in half and you might have hired an extra 6% and ended the Great Recession very quickly. But with 6% more workers and everyone paying half as much tax, no, you will not increase tax revenue. You will increase the debt.

    But that’s a good tradeoff. Unemployment is quite wasteful for society and costly in many ways for the unemployed. The trick is to pay down the debt once the economy is humming again. The graph shows Bill Clinton did that and Obama is headed that direction, but Reagan and the Bushes didn’t. That’s because they believed in the Voodoo — cut taxes and tax revenues will increase. No need to worry about the debt. So they didn’t.



    I’m expecting more of the same shit from the Donald and his advisors…