Thursday, December 26, 2013

Gold, Interest Rates, and Inflation

Here is an interesting chart comparison.

The conventional wisdom seems to be that gold does poorly in an environment of rising interest rates. My contention has been that interest rates lag inflation. ie, that interest rates only go up grudgingly after some level of inflation pushes them up.

These pictures seem to show that gold started it's historic (at the time) rise in the late '70's at the same time that interest rates started to go up. It was as interest rates were declining, from the early '80's to about 2002, that corresponded to the bear market in gold. This was a period of disinflation that roughly corresponds to the surge in low priced imports from China/Asia and a general deflationary trend in consumer prices.

Can't we expect the deflationary trend from cheap imports to abate? As China converts from a purely export economy to a more mixed economy I expect more purchase power parity in the Chinese currency. This should result in a general rise in the prices of our consumer imports. And IF the rise of the middle class is able to be sustained in China and in India (to a lesser degree) I would expect to see renewed support for the basic materials as well as food around the world. Next year may be the start of these trends.
And I haven't even mentioned the massive "money printing" that remains to be consummated as banks renew lending as consumer confidence grows, and as the US energy advantage creates more jobs.

My point from this historical data is that inflation leads interest rates. And gold matches inflation.

And furthermore I don't expect our Federal Reserve to be proactive in the inflation vigilance.

Control risk,

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