Real Interest Rates and the Gold Price

OWNx TeamGlobal Finance and Economics, Gold & Silver Market, News & Current Events

An interesting development has occurred in the markets that would suggest a sustained, multi-year rise in gold and silver prices is indeed around the corner. This week Fed chair Janet Yellen signaled what the FOMC’s intentions are on future interest rates

Prior to the meeting, some analysts were looking for a more hawkish stance due to recent strength in economic data. This left the markets fixed on rising nominal rates (the stated rate charged on loans). However, a more dovish tone combined with a simultaneous uptick in inflation caused the focus to shift to “real” interest rates (stated rate minus the inflation rate). The price of gold and silver jumped this week on this shift in focus.

After languishing in March, the price of gold and silver jumped on this shift in focus. This increased volatility is to be expected. Many markets, including interest rates and gold, are undergoing a long term transition phase. Supporting this view is the February producer price index, which rose .3% after posting a surprising .6% gain in January.

Increasing inflationary pressures along with the Fed’s promise to keep monetary policy “accommodative” sets up a real possibility of sustained negative real interest rates for the foreseeable future. All of this has positive implications for gold according to UBS’s Wayne Gordon.

“That means real interest rates go deeper into negative territory in the U.S., that means a weaker U.S. dollar and it means a better gold price.”

  • Rising inflation expectations.
  • Negative interest rates.
  • Rising commodity prices.

All of these provide a backdrop that would support a sustained, multi-year rise in gold and silver prices. Transition periods are the best time to dollar cost average into the asset class that is preparing to make a turn.

The evidence continues to mount that gold and silver prices today are in an attractive range for long term investors. You may want to consider setting some aside in an IRA. It’s not too late to make your annual contribution, and the technology behind our OWNx IRA makes it a cost effective alternative.

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