Gold and Interest Rates: The Correlation and Implications

By Murray Sabrin
June 28, 2013

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With the precipitous drop in gold prices since it reached its all-time high of about $1900 per ounce 2 years ago, pundits on financial cable shows and in the print media are declaring the end of the gold bull market that began in 2001. One of the primary reasons given for the end of the bull market is the prospect of rising interest rates. According to these mavens, rising interest rates increase the opportunity cost of holding gold, because gold does not pay interest, and therefore there is no need to hold gold in a rising interest rate environment.

Not so fast. According to the chart, gold and interest rates were perfectly correlated, rising simultaneously from 1971 through 1974 and then again from 1976 to the blow off stage in 1980.

The gold bear market that began in 1980 and lasted for two decades was accompanied by the great disinflation that saw the 10-year Treasury note decline from 16% to about 4% in 2001. The gold bull market of the 21st century was accompanied by relatively flat interest rates.

Thus, could the $700 drop in the price of gold since 2011 be setting the stage for the next great leg of bull market in gold, just as the 50% decline from December 1974 to August 1976 preceded the eight fold increase in the price of gold from about $100 to more than $800 per ounce? If this scenario unfolds, then the price of gold could reach $10,000 per ounce in a few years.

I am not predicting the price of gold will go to $10,000 per ounce, but if history is any guide, then we cannot rule out the next great stampede into gold as the Federal Reserve's money printing continues and possibly accelerates.


Murray Sabrin, PhD., is professor of finance at Ramapo College of New Jersey. He blogs at www.MurraySabrin.com. He is co-founder and president of Conger LH, the world's first Lubrihibitor (www.congerlh.com).

 

 

 

 

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