Thursday, May 31, 2018

When Interest Rates Go Up, Gold Doesn’t: It’s Totally Fallacious

The argument that when interest rates go up, gold goes down is a “totally fallacious” one, said Eric Sprott, billionaire precious metals investor and founder of Sprott Inc.

“I don't believe the argument, but it's an argument that's made … Interest rates go up, gold doesn't go up, it's totally fallacious. But you get it in the markets,” Sprott said during Sprott Money’s Weekly Wrap-Up on Friday.

What’s actually next in store for gold prices will be determined by how investors react to future financial conditions in the U.S. as the Federal Reserve proceeds to tighten its monetary policy, according to Sprott.

And a good sign for the yellow metal is that the economy might not be ready for higher interest rates, he noted.

“What is the market going to do as the Fed literally tightens? Other things are going to go down, car sales are going down. It's getting tougher for the average American,” Sprott said. “In one state they're raising [Obama care premiums] 64%, in another one, 98%. Who could afford this stuff? We say there's no inflation. I mean that’s a 60% rise, if you already spend 17% of your salary on healthcare, that would be an increase in your inflation index of 6% for the year.”

What worries Sprott is how the markets will react when these risks materialize. And the likely scenario for the billionaire investor is the Fed pausing its tightening cycle, which will benefit gold.

“I found it very, very instructive that the UK passed on raising rates … And the Fed may, in fact, have to pause here somewhere along the line because [the economy is] not nearly as strong as we're all thinking it is,” Sprott said.

The American central bank might at the end of the day say: “Well, you know, if the numbers aren't looking that good, we're not raising,” according to Sprott. “And it could be that that's ultimately what happens with the Fed. And, of course, that would take away one of the arguments for gold not going up.”

According to the CME Fed Watch Tool, there could still be three more rate hikes coming this year.

On Monday, Cleveland Fed President Loretta Mester also expressed her support for gradual rate increases.

“In my view, the medium-run outlook supports the continued gradual removal of policy accommodation; it seems the best strategy for balancing the risks to both of our policy goals and avoiding a build-up of financial stability risks,” Mester said in prepared remarks for a speech in Paris. “We want to give inflation time to move back to goal ... this argues against a steep path.”

Earlier this month, the Fed kept interest rates unchanged within a range between 1.50% and 1.75%, while also making cautious comments regarding inflation pressures.

- Source, Kitco News