-- Posted Sunday, 8 September 2013 | | Disqus

Think back to 2003-6 and then interest rates were heading up from a notable low. That might well be the prospect for the next few years if the Fed starts to unwind its QE program from the 18th of this month.

Gold prices rose by 60 per cent from 2003 to 2006. You might have thought that higher interest rates meant a higher dollar and that would strike gold prices down, but that did not happen back then.

$400 top!

ArabianMoney recalls a meeting held in Dubai with Credit Suisse’s global expert on gold in 2004 at which we were told with great emphasis that $400 an ounce was the absolute top for gold. Only when gold sprinted above $450 did we realize this was complete nonsense.

Gold is not directly correlated to the US dollar or interest rates though it does have a preference for low or negative real interest rates that compensate for its own lack of yield.

By way of illustration if interest rates are rather low and inflation high then gold is a way to protect the value of your wealth as the gold price will rise to compensate for the underlying erosion of value and then some as other investors realize this.

Still do we not live in a world of very low inflation? Well only if you believe the official statistics. Economists who rebase present inflation statistics to the old methodologies come up with much higher figures.

ArabianMoney has been traveling a lot and widely this summer and we have noted the rising cost of supermarket baskets from Austria to Canada and the UK. Entrances to attractions were up by 20 per cent in two years on our calculations for Vancouver.

Chinese aunties

Investors also shop in supermarkets and like to visit places and eat out. The Chinese aunties buying gold are perhaps the best example of a consumer group that is acting on its own instincts and buying gold as an anti-inflation hedge.

So if the Fed can now manage to raise the cost of borrowing without crashing the financial markets so badly that they quickly have to reverse course, then gold bugs should not necessarily run for the hills.

Higher interest rates are not always bad for the price of gold, or silver for that matter whose outperformance of gold on the way up is well established.

-- Posted Sunday, 8 September 2013 | Digg This Article

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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