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Is gold really the asset class most at risk from higher interest rates?

 -- Published: Sunday, 24 August 2014 | Print  | Disqus 

By Peter Cooper

A five-year regime of artificially low US interest rates is responsible for a bubble in stocks, bonds, real estate, emerging markets and many other asset classes. But can it really be said to have boosted gold prices?

Certainly not over the past three years. Gold peaked in October 2011 and silver in April of that year. Precious metal prices today are not so far away from where they stood five years ago.

Gold inflation low

Why then should a rise in interest rates be a big risk to precious metal prices if they have been amongst the assets least impacted by ultra low interest rates? Surely the risk is with those assets, not gold and silver.

But as Reuters reports traders last Friday noted that ‘gold prices continued to hover just above a two-month low reached on Thursday. Bullion has dropped about three per cent in the past five sessions, underperforming US Treasury bonds, which are considered the preferred safe-haven investment.’

If there is really a high risk of interest rates going up then investing in bonds will be suicidal. Lest we forget bond prices move in the opposite direction to interest rates as an automatic function of that instrument.

What happens to real estate prices when interest rates go up? That’s a no-brainer. They go down because you have to pay more to ‘own’ a house with a mortgage lien over your head.

As for equities higher interest rates might be seen as a broad indicator of a recovering economy but they are a direct cost on business and on the consumer’s pocket too. Stock markets almost always fall as interest rates pick up, and often do so dramatically when they are in a bubble.

So where is your least worst option? Precious metals perhaps? And when all the other major asset classes head south into which narrowly held market will the smart money go?

Life insurance

Gold is often seen as an insurance policy against financial Armageddon. Yet that is where we are most likely going as asset bubbles meet their inevitable demise and the over-borrowed go spectacularly bust.

Sat in London today I have witnessed house prices falling six per cent this month, according to the huge property website Rightmove and reports of a surge in 30-year mortgages as the last to get on this ladder struggled to pay massive house prices before this price slump. A sad start in life for some young people.

Are you really going to tell me that holding gold is a more risky prospect? What would you rather own when starring into the great abyss? What are investors going to dump? And what will they buy next?

Gold and silver is what you should be buying as these bubbles burst. This asset class alone will hold and improve its value as everything else comes crashing down. Then you can use it to buy houses, stocks and bonds at reasonable prices.


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 -- Published: Sunday, 24 August 2014 | E-Mail  | Print  | Source:

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