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When Interest Rates Go Up, Gold Usually Goes UP, Not Down

Posted on Thursday, March 16, 2023
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by Mike Fuljenz
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Two years ago this week (March 9, 2021), when gold was $1,720 and the Dow was 32,000, I wrote this:

The pundits keep getting this wrong, but they keep saying (in press reports) that “gold goes down when interest rates go up since” (they say) “gold pays no interest and therefore it can’t compete with interest income,” but in nearly all the historical instances of rising interest rates, gold went UP, not down.

  • In gold’s greatest bull market, from 1976 to 1980, interest rates soared to their highest levels in U.S. history, with the Prime rate reaching 20% in 1980.
  • In gold’s second greatest bull market, from 2001 to 2011, interest rates rose rapidly from 2003 to 2007, at a time when gold had its greatest price increase.
  • From 1973 to 1974, when gold was rising rapidly, interest rates were rising too, and when gold fell in 1975-76, interest rates were falling too.

The way to understand this anomaly is that higher interest rates anticipate higher inflation, which will lift gold at a faster rate than either inflation or interest rates can match, and once a few investors realize that fact, the gold market will begin to take off. The gold market is much narrower than stocks, bonds or global currencies, so a small amount of buying in the gold market can move gold far more than it can move stocks, bonds or currencies. Historically, gold and the dollar have moved in opposite directions, but that has been a shaky correlation over the last year due to COVID-19 putting a damper on the “velocity” of money – how fast it is spent. Consumers and investors have tended to sit on their stimulus money rather than spend it, so inflation has not erupted except in the stock market, real estate and Bitcoin.

We’re about to face reality with inflation. Fed Chair Jerome Powell says there is virtually no inflation and that any inflation we may face will be “transitory,” but President Biden plans to do away with fossil fuels and concentrate on underwriting inefficient forms of fuels that must be underwritten by taxpayer funding.

— Now two years later, with short-term interest rates up from near-zero to nearly 5%, gold is up 5.6% the Dow is up only 2.5% in the same time period, and the Fed was totally wrong about “transitory” inflation. It’s still early in the re-inflation cycle as Powell promises more increases.

Another indicator of the long-term erosion of the dollar is the huge growth in deficit spending….

In 2023, President Biden is Presenting a Spendthrift Budget Relying on Tax Increases for Funding

It’s a little ironic to watch the House and Senate members grill the Chairman of the Federal Reserve for his monetary policies this week – like Massachusetts Senator Elizabeth Warren accusing him of putting two million people out of work with his high-interest rates – when it is Congress and the President that caused the Fed to print those trillions of dollars to fund the programs which they, Congress and the President, mandated.

Very soon, President Joe Biden will present a budget to Congress which relies on vast new spending plans with no major cost-cutting. They will pay for those plans with tax increases on “the rich” – many of those earning under $400,000, whom he promised never to tax, during his campaign for office. Congress has its part, either in rejecting this budget or in crafting its own more responsible cost-cutting budget in the House.

We are already well past the point where our accumulated debt (over $31 trillion) has passed the annual GDP ($23 trillion). The only other time this happened was at the end of World War II, when we fought a global war to save Europe and Asia, across two oceans, spending and borrowing every dime possible.  We paid most of that borrowing back over the following 20 years, as the King Dollar (and gold) ruled the postwar world until about 1965, when war spending and inflation began to erode the dollar once again.

After the Cold War ended, through a combination of peace, prosperity and cooperation between Parties, Washington balanced the budget between 1998 to 2000, and gold dropped to $255. The national debt was under $10 trillion. Then came 9/11 and massive budget deficits again. Gold soared. The federal government has run a budget deficit every year since 2000, forcing it to borrow money and add to a debt that now runs at $31.5 trillion, with trillion-dollar-per-year budget deficits for as far as the eye can see. History has proven that raising taxes won’t raise revenues. Actually, lowering top tax rates raises more revenues – as the Kennedy/Johnson, Reagan, Bush and Trump tax cuts all showed – but Biden will try to sell the populist message of tax increases to a Republican Congress. We need the Republicans to hold firm against that.

In the meantime, as the budget deficit increases exponentially, Congress and the President will rely on the Fed to “solve inflation” by raising rates, causing higher deficits in a vicious circle, which will devalue the dollar further and keep pushing gold’s value higher in dollar terms over time, as it did in similar debt cycles in the 1970s and early 2000s leading to bull markets in precious metals and rare coins.

Are our elected officials that far out-of-touch with reality that they can’t start working on slashing debt instead of spending more? When our leaders live in a delusional state and refuse to face the obvious truth, history has a habit of repeating itself in a bad way. If you can, write your congressman and/or senator and tell them you don’t want your grandkids to pay for the unforgivable financial mismanagement of today. There will be a breaking point, but it doesn’t have to be. Spread the word. Let’s balance the books.

 

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David Millikan
David Millikan
1 year ago

With incompetent corrupt biden, Yellen, Federal Reserve officials, IMF officials, and this being intentional (to crash more banks) it is no surprise that the price of gold drops instead of going up.
Just like our bank accounts keep dropping due to their thievery, incompetence, and corruption to take over and SPY on our bank accounts Illegally and Unconstitutionally.
It all boils down to Criminal Corruption and Thieves running amuck.

Robert Zuccaro
Robert Zuccaro
1 year ago

Funny how cocaine and other drugs stay the same though.

Jack
Jack
1 year ago

Taxing “the rich” isn’t populism, it’s envy. It’s not called a deadly sin for nothing.

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