Interest Rates and Gold: Reversal vs. Range Bound

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

As interest rates signal a trend change it is important to consider all the possibilities. Certainly one can make a case for rising interest rates due to inflationary pressures. However because of all the cross currents that rising rates and a strong dollar would create, it is possible that it will be years before we see a major upward thrust in interest rates.

In his article “Secular Shift in Interest Rates,” Matthew Kerkhoff makes a case that we could see the continuation of a five year sideways movement of rates, bound within a range of 1.5% and 3% on the 10 year US Treasury. Is this possible?  Absolutely.

With massive sovereign debt, the governments of the world are in no way cheer leading for higher rates. Above 3% budget deficits explode. Yet these same governments are cheer leading for stronger economic growth and relief from a persistent threat of deflation. If they get their way, natural market forces would agitate for higher rates. There is the rub. While they do not want higher rates, they want the conditions that generate higher rates.

These competing needs could produce a tug-of-war that extends the time period where rates remain bound in the 1.5% to 3% range. Such is the tangled web governments and central banks have weaved post the 2008 crisis.

What then happens in the spot gold and silver markets?

It is possible that with a tug-of-war in interest rates, gold and silver prices may continue to be range bound for awhile as well. However, if this tug-of-war creates uncertainty and instability in the financial system, gold and silver prices very well could lead interest rates to the upside in the years to come.

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