Real Interest Rates Rises Will Hurt Metals Prices


"A Rise in interest rates could 'take some of the froth out of commodities.'"

Real interest rates remain subdued currently, but a rise will have a negative impact on commodities prices, particularly for precious metals, commodities market analysts said.

There has been some concern that the low interest rate environment is changing as countries like China and India raise rates to combat inflation and the European Central Bank President Trichet signaled last week it may consider raising interest rates as soon as April when it meets again.

"It will take the froth out we've seen in commodities and that's particularly true for precious metals. We'd see significant change in investor behavior. But that's unlikely to occur this year. The trend is low to negative levels in the three major currencies," said Phil Klapwijk chairman, GFMS.

Klapwijk and other market analysts spoke at a commodities market forum at the Prospectors & Developers Association of Canada conference in Toronto on Sunday.

It's very unlikely that the U.S. or Japan will raise interest rates because those economies are seeing fragile rebounds in growth and central banks will not want to kill any recovery. The ECB could raise rates as much as 100 basis points by the end of this year, but even a move like that, in the context of an inflation rate of 2% still, keeps real rates in negative territory, Klapwijk said.

Michael Jansen, analyst at JPMorgan Securities, said the gold market might be experiencing some "friction" lately because one measure of inflation—the U.S. Treasury Inflation Protected Securities, an inflation-linked debt security—has crept up to a current yield of 1.2%. That's double of what it has been and above the current Federal Funds target of zero to 0.25%. That's one reason why there's been some movement by the investor class out of exchange-traded funds.

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