There are some preconceptions about gold and its relationship with interest rates that are not true.
The narrative goes that rising interest rates make gold less attractive to hold as it doesn’t pay a dividend. There are, however, some fundamental flaws in this assumption.
First off, we must look at gold holdings. Less than 0.5% of gold traded daily is held as physical, with the majority being paper derivatives and make-belief futures contracts. The opportunity cost of holding gold is no different from any other non-tangible stock as so much is paper traded.
Secondly, raising interest rates is a very dubious double-edged sword. In the current environment, its intention is to be used to counter rising inflation, however historically, it has also slowed down the economy, and hence markets have begun to price this in and begin to worry. If stocks are valued high, and huge inflation is making mediocre returns on investments negative in real terms, money has always rotated from stocks into commodities.
Thirdly raising rates by 0.25% will not hurt gold when real rates are still over - 5%. Should this Thursday’s figure come in at 7.3% expectation, it would be the highest since 1982. With the benchmark 10-Year Treasury Yield hovering under 2%, this is still a considerable loss to place your money in government debt.
Finally, in the last two examples of extremely high inflationary periods, a rising gold price has correlated with rising rates after an initial dip when the weak longs sell-off regretting their decision shortly after.
The above is based on historical patterns, and there is nothing to suggest that the price action in gold and silver is anything other than coiled ready for the next move higher. This has been a long, long period of consolidation.
Rallys have been sold, and sell-offs have been bought. The longer the consolidation, the bigger the move. While we are not big believers in technical analysis in such manipulated markets, it is difficult to argue, given the chart below, that the rising wedge channel breakout is imminent. It almost looks too coincidental with the first interest rate hike The Fed states will be in March.
Is the long wait soon to be finally over for gold's investors? Only time can tell.
