Will Higher Interest Rates Kill the Gold Bull?


". . .just what will happen to gold when the interest rate handle is eventually cranked?"

The whole flap this past week over possibly replacing loose money Ben Bernanke with a dollar defender like Paul Volcker makes one wonder just what will happen to gold when the interest rate handle is eventually cranked. There are two possible investor reactions: "Oh my, they're going to defend the dollar, I'd better sell my gold" or "Oh my, there's an inflation threat, I'd better buy some gold". Most of the commentary I've been seeing tends to be of the first type - if they start to defend the dollar, gold will go down.

What happened as the previous gold bull came to its end in the 1970s? Well, if you chart the two, the USD vs. the prime rate over the end game for gold's bull market back then, you see this:

Clearly investors seemed to be thinking more along the lines of choice #2 above - rates and gold responding in unison to an inflation threat. The interest rate climb, which took place over nearly 10 years, ignited gold from $35 to $850. The dollar eventually did a huge climb to match the interest rate climb, but this was many years behind the rate climb - beginning in 1980 and peaking in 1985.

In our current situation, we have not even begun to raise rates, which suggests an even more powerful climb ahead for gold than we have seen thus far.

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