Gold’s Rise To Continue Above $2,500/oz On Negative Real Interest Rates
Our friend Stephen Flood's GoldCore.com writes today:
Peaks in gold prices since 1975 have usually been associated with rising real interest rates.
Times when real interest rates fell in tandem with gold prices include 1987-1990 and 1996-2001.
Even though real rates are have risen slightly, they remain below their historical average and levels below 2% have still been supportive of rising gold prices.
The 2% real interest rate threshold has served as an inflection point for gold prices.
Gold prices languished from 1980 to 2000, when real rates stayed higher than 2%. While real rates were volatile during this time, gold prices continued to decline even as real rates were relatively unchanged.
Gold prices languished from 1980 to 2000 and had declining correlations with debt levels because GDP growth was sufficient to mute fears about budget and deficit issues. The current economic recovery has been too weak to support a sustained rise in real rates above the 2% level that has acted an inflection point for gold prices.
With energy and food inflation deepening and soon to affect consumer price indices, interest rates may have to rise significantly in order to restore real interest rates above 2%.
This is with ex Federal Reserve Chairman Volcker did in the late 1970’s - when he increased interest rates to above 15% in order to protect the dollar and aggressively tackle inflation.
It is unlikely that similar ‘hawkish’ monetary policy would be implemented by the Bernanke Fed today. It is unlikely that they would and even doubtful if they could – given the appalling fiscal situation and levels of debt in the US and global economy.
A continuing succession of higher real gold prices above the inflation adjusted high, or real record high, of $2,500/oz is likely until we see interest return to more normal levels and zero percent interest policies are supplanted by positive real interest rates.
September 5, 2012 (GoldCore.com)