Why a Rate Rise Could Be Good for Gold & Silver

Gold and silver took a hit last week on the ‘news’ that the US Federal Reserve (“Fed”) is now looking more likely to raise rates in December (i.e. one doesn’t need a safe haven investment if things are awesome enough to raise rates…). We are clearly on record stating their doing so would not be because the broader US economy is in good enough shape, but because at some stage they need to rip off this financial markets bubble inflating bandaid.  There is another thing to consider and that is they have a particularly lousy track record of predicting markets and the ramifications of their actions.  London’s The Telegraph ran a story over the weekend titled “Another recession is coming - the only question is how bad” including the following quote from the legendary American economist Rudi Dornbusch:

“none of the US expansions of the past 40 years died in bed of old age; every one was murdered by the Federal Reserve”

The article rightly goes on to point out:

  • All US business cycles have ended on the actions of the Fed raising rates.  “invariably they leave it too late, so that when they do apply the brakes, the economy crashes.”
  • Both the US and UK current growth expansions (mild as they are) are getting long by historical standards. In the US “a full 76 months, against the 58.4 month average for the 11 post war cycles identified. Only three of these cycles have been longer.”  This one more than any other fuelled by printed money and zero interest rates – not fundamentals.
  • The UK is already showing very real signs of a slow down and the OECD is pointing “unambiguously to a pronounced UK slowdown and to a loss of growth momentum in the US.”
  • Europe and China (they don’t mention Australia, but us too) are both so bad they are easing monetary policy not talking about tightening.

As we stated earlier re ‘the bandaid’ they go on to say:

“The other is that it [Fed] simply yearns, like the rest of us, for a degree of normality in interest rates. If it can’t do it now, with the economy growing, when will it ever?

Regrettably, it may already be too late. After seven years of “unconventional monetary policy”, the world economy is once more drowning in easy credit, with few of the underlying causes of the global financial crisis even remotely addressed.”

Clearly the threat of raising rates should not be considered ‘bad’ for gold and silver… indeed almost the opposite seems the case.