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How Will Gold Perform As Interest Rates Rise?

By: Peter Cooper, Arabian Money


-- Posted Tuesday, 16 March 2010 | Digg This ArticleDigg It! | | Source: GoldSeek.com

All eyes will be on the Federal Reserve interest rate statement tonight, and whether or not the rate actually rises there can be no doubt that ultra-low interest rates are not going to last forever, even if financial markets sometime seem to behave as though this was the case.

 

So what will happen to the gold price as interest rates go up? The most superficial analysis is to say that gold does not pay interest so investors will take their money out of gold and put it into cash.

 

Investment logic

 

But this is a complete nonsense. Investors will also look at why interest rates are going up. Is it because money printing by the Fed now threatens a deluge of inflation? Is it because the bond market looks unstable and investors are demanding a higher risk premium?

 

Indeed, you have to consider the underlying security of cash as an asset in such circumstances. Will the dollar devalue as inflation erodes its buying power? And how do you hedge against that?

 

George Soros got it right recently when he said that gold was the ‘ultimate bubble’, that is to say the last asset class in the chain to become a bubble before the whole cycle starts again. For in past financial crises the clear pattern has been bank failures then a bond market crash and a rush into precious metals.

 

Government intervention

 

Government intervention on a historic scale has mitigated the bank failures but led to an even greater issuance of government paper, and merely delayed the inevitable bond market crash that will come as – wait for it – interest rates go up.

 

Gold then becomes the final safe haven asset and the limited supply of gold means that its value will surge to unheard of levels. Dr Marc Faber recently suggested that $1,000 gold might be seen as similar to the Dow crossing 1,000 in 1982.

 

Arabianmoney.net editor and publisher Peter Cooper explains in far more detail how gold price could pass $5, 000 and head even higher over the next few years in his latest book published on Amazon.com this week. (click on this link to buy a copy)


-- Posted Tuesday, 16 March 2010 | Digg This Article | Source: GoldSeek.com


About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in www.ameinfo.com, which later became the Middle East's leading English language business news website.

Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.

Order my book online from this link




 



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