For the most part, the precious metal markets have been very kind to investors throughout 2016. Gold has made its first significant gains since the price began to tumble three years ago, and though silver has lagged behind gold, it has also risen in value. That is until a few weeks ago, when both precious metals started to lose their steam for reasons that were lost on layman precious metal investors.
It started to look like maybe these metals weren’t ready for another bull run after all. That perhaps, the impressive moves they’ve made in the last six months have been nothing more than a temporary market aberration. In reality, that couldn’t be further from the truth. If anything what we’re seeing is an opportunity in precious metals.
To understand why, you first have to realize that the recent price declines aren’t a random occurrence. Everything we’ve seen in the past month is directly related to the fact that the Federal Reserve has been talking about raising interest rates again.
Gold fell below $1,200 for the first time since mid-February on Monday, as comments from Federal Reserve Chief Janet Yellen on the likelihood of higher U.S. interest rates sent the dollar to two-month highs.
The Fed should increase interest rates in the coming months if the economy picks up, Yellen said on Friday, bolstering the case for a rate hike in June or July. St. Louis Fed President James Bullard said on Monday global markets appeared to be “well-prepared” for a summer rate hike.
An increase in U.S. rates would raise the opportunity cost of holding gold, which does not earn interest. It would also bolster the dollar, making gold more expensive for holders of other currencies…
For the past few weeks, various Fed officials have been quietly mentioning that they want to raise interest rates, and the gold market has responded accordingly. It makes sense.
People flock to gold when they don’t think their currency is going to hold its value. If interest rates are near zero, and the numbers in your bank account aren’t keeping up with inflation and rising costs of living, then there is no reason to save your money in that currency. If you want to preserve your earnings, you have to invest in something that will likely go up in value. If interest rates go up however, then keeping your dollars in the bank sounds safer than buying gold.
So it’s no surprise that investors are stepping out of the precious metal market, given what they’ve been hearing from the Fed. However, many of these investors are missing the bigger picture.
Based on everything that Fed officials have said so far, their interest rate hike is going to be modest. Every time they talk about it, they speak of it in a restrained way. In all likelihood, we’re talking a .25% rate hike, or something to that effect. In the big scheme of things that’s nothing.
Since 2009 the interest rate has been at near zero, but historically it was around 4% or more. If it goes up to .75%, it will not give our savings accounts anything substantial. It is nowhere near enough to keep up with rising living costs in America, which means that gold will still be a very reasonable investment.
Sure, the price of gold will slump for a while, but not for long. America’s economy still hasn’t recovered anything substantial since the great recession. Public coffers have never been in so much debt, and private citizens aren’t fairing much better either. Both the tech sector and the housing sector appear to be growing into new bubbles, and to top it all off, the economy is way overdue for another recession. It’s been eight years since the last one, and no economy goes without a recession for much longer than that.
When that happens, the Fed will have very little room to reduce rates. If anything, they may take the same asinine route that countries like Denmark, Sweden, and Japan have taken, and start to institute negative rates. But at the very least, they will go back to near zero rates. Either way, there will be a rush into gold and silver by investors and savers who want to protect their money.
In other words, what we’ll be seeing in the price of gold and the price of silver over the next few months is the last dip before their values balloon again. It will be a very good time to beat the herd of freaked out investors, and buy bullion while prices are low.
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Contributed by Joshua Krause of The Daily Sheeple.
Joshua Krause is a reporter, writer and researcher at The Daily Sheeple. He was born and raised in the Bay Area and is a freelance writer and author. You can follow Joshua’s reports at Facebook or on his personal Twitter. Joshua’s website is Strange Danger .