Gold finished last week at $1,066/oz., just slightly lower than the previous week’s close. Silver ended slightly higher at $14.15/oz. It is a very interesting time in the market, as both metals actually hit multi-year lows during the week. Gold dipped below $1,050/oz. for the first time since 2009!
The market was focused on one critical story this week: the Federal Reserve. The U.S central bank raised the Fed Funds Rate on Wednesday from a historically low range of 0%-0.25% up to 0.25%-0.5% and signaled that there could be as many as four additional quarter-point rate increases in 2016.
This is the first time that the Fed has increased its benchmark interest rate in almost a decade…
Now, you may have read here and there about how precious metals could be impacted by a rising interest rate environment. The story goes that since gold doesn’t generate a yield, it might appear less attractive to investors compared with stocks and bonds. However, as analyst Pater Tenebrarum points out, the historical evidence does not support this belief of gold losing its allure during times of rising rates.
For example, when the Federal Reserve increased interest rates during the 1970s, gold performed extremely well. During that same time frame, bonds declined in value while stocks generated negative inflation-adjusted returns. Gold also performed well during the last rate-hike cycle from 2003-2007.
Consider this… during a rising rate environment, these gold-positive trends are also present:
Banks take capital from the stock markets (some estimate this capital to be over 2.5 trillion) to lend out, putting downward pressure on stocks
Cost of capital rises for business, increasing economic uncertainty and making investment in new ventures less likely
Inevitable expansion of the monetary base brings more inflation in the future
More inflation, more currency devaluation and an erosion of all your paper assets
This explains the continued appeal of gold and silver in this type of environment, as a tool to help safeguard your family and the long term preservation of your assets.
Analysts such as Peter Schiff believe that this rate hike is a temporary measure to help the Fed to maintain its credibility in the face of mounting economic evidence that the Fed’s hand on the tiller is not steady. Schiff maintains that the Federal Reserve will have to resort to additional quantitative easing eventually in order to prop up the markets and the economy.
In fact, Schiff’s latest long term gold target is an eye-popping $5,000/oz.
WHAT DOES THIS MEAN? TIME TO ACT!
There has never been a more important time to invest into precious metals. Don’t sit on your hands when you could be acquiring physical Gold & Silver for delivery or placing it into a Home Storage IRA.
