It seems that gold and silver have been falling lately on the expectation that interest rates are now going to rise much faster than most people had previously thought they would.
However the idea that rising interest rates are a negative to gold in the long run is not backed up by what has happened previosuly.
Read on to see why…
By Justin Spittler
Interest rates could soon take off.
If we wrote this a few months ago, you might have thought we were crazy. That’s because the Federal Reserve’s done everything it can to avoid raising interest rates this year.
In March, it didn’t raise rates because of a bad jobs report. In June, it held off due to concerns about the global economy and “market volatility.” In September, it didn’t raise rates because it’s waiting for the job market to improve.
These are legitimate reasons to not raise rates…but the Fed also held off for another reason: the presidential election.
You see, the Fed has held its key rate near zero since 2008. This made it incredibly cheap for households and businesses to borrow money. In many ways, the economy is now hooked on cheap money.
At this point, the Fed could trigger a financial crisis or recession by raising rates. And that’s the last thing it wanted to do before the election.
• With the election behind us, most people think the Fed will finally raise its key rate next month…
To be fair, most investors have been preparing for a December rate hike since the summer. But now that Trump’s going to be president, it looks like rates could rise faster than people expected.
You see, most people thought the Fed would raise rates slowly if Hillary won. But Trump has a much different plan for America.
He wants to grow the economy using fiscal stimulus, which basically means government spending. Specifically, he wants to spend hundreds of billions fixing the country’s infrastructure.
According to Bloomberg, Trump’s policy could force the Fed to jack up rates quicker than they would have under Hillary:
“We do view the election of Donald Trump as a game changer,” said Adam Donaldson, head of debt research at Sydney-based Commonwealth Bank of Australia. “The strong bias toward fiscal expansion and inflationary policy represents a stark change to the malaise of recent years. This opens the door for the Fed to hike in December, but also more quickly in 2017 and 2018 than previously expected.”
• This is a HUGE deal…
You see, interest rates aren’t some arbitrary number. They’re the price of money. A big move in interest rates affects everything from stocks to commodities.
You also have to remember that almost no one thought Trump would win. The market didn’t “price in” rates rising quickly. That’s why we’ve seen big moves by every major financial asset since the election.
Today, we’re going to show you how the prospect of rising interest rates is impacting different asset classes…starting with a sector that’s very sensitive to interest rates.
• Utility stocks tanked after the election…
The sector closed the week down 4.08%. Keep in mind the S&P 500 jumped 3.7% last week. According to Fidelity Investments, utilities were by far the worst-performing group in the S&P 500.
Utilities provide electricity, gas, and water to people. They sell things that people can’t live without. This makes for relatively stable revenues, which allows them to pay steady dividends.
Many investors own utility stocks specifically for their dependable dividends. That said, utility stocks aren’t as attractive when interest rates are high or likely to rise. That’s because investors can collect decent income in other assets, like bonds.
If rates rise like many investors expect, utility stocks could keep falling.
• Emerging market assets could also be in big trouble if rates head higher…
As you probably know, it’s riskier to invest in emerging markets than in developed countries like the U.S. or Japan. To attract money, emerging markets offer higher returns.
For example, Brazil’s 10-year government bond pays a 12.1% yield right now. That’s almost six times more than the 2.1% yield of the U.S. 10-year Treasury.
If U.S. interest rates keep rising, U.S. investors could start pulling money out of emerging market assets. According to Reuters, this is already happening:
Emerging market shares and currencies slumped on Friday as investors feared higher U.S. interest rates under incoming President Donald Trump will spark capital outflows…
The most volatile trading on Friday was across emerging markets, as investors bet that Trump’s fiscal policies will be inflationary, push U.S. rates up and drive investors into dollar-based assets.
• The iShares MSCI Emerging Markets ETF (EEM) plummeted last week…
EEM tracks emerging market stocks across the world. According to Bloomberg Markets, the fund suffered its worst day since 2011 on Thursday, when it experienced more than $1.5 billion in withdrawals.
You can see it’s now down 8% since Election Day and trading at its lowest level since July.
On Friday, Bloomberg Markets warned that emerging market stocks could head much lower in the coming days:
“EM ETF flows are about to look like the elevator scene from The Shining as you have the double whammy of rising rates and an oncoming ‘America first’ trade policy,” writes Eric Balchunas, ETF Analyst at Bloomberg Intelligence. “We could see $20 billion in outflows by the end of next week.”
• The anticipation of higher interest rates has hurt gold, too…
Last week, the price of gold fell 6.1%. It’s now trading at its lowest level since April.
Like utilities, gold sold off due to expectations that interest rates will head higher. You see, unlike a bond, gold doesn’t pay interest. Because of this, many investors don’t like to own gold if they expect rates to rise. Of course, regular readers know the conventional wisdom about gold and interest rates is dead wrong.
As we’ve pointed out many times, the price of gold has actually increased after the last four Fed rate hikes.
You can see in the chart below that the price of gold jumped 20% in just six months when the Fed started raising rates in 2004.
In other words, gold can still do very well if the Fed raises rates quickly…which is still a big “if” at this point.
• You also have to remember that we don’t buy gold to make a quick profit…
We own it because it’s real money and serves as the ultimate protection against financial chaos. And right now, there’s a lot of uncertainty about the economy and financial system.
If you’re nervous about the economy, hold on to your gold. If you’re nervous about the financial system, hold on to your gold. If you’re nervous about our new president, hold on to your gold.
Even a small gold position could save you from huge losses when the next financial crisis hits.
If you would like to buy gold while it’s “on sale,” check out this presentation we recently put together. It reveals a “loophole” in the global gold market. In short, one of our analysts found what may be the cheapest way in America to buy gold.
We can’t say how long this offer will last. So make sure to watch this video today if you’re thinking about buying gold. Click here to learn more.