What Falling Interest Rates And Falling Gold Prices Have In Common

Includes: DIA, GLD, IEF, IWM, QQQ, SPY
by: Paul Nathan


The level of Interest rates and gold prices have something in common.

Both interest rates and gold prices are falling and reflect future falling growth rates and falling inflation rates -- the exact opposite of what we have today.

The Fed's monetary policy and the federal governments regulatory and fiscal polices are aggravating the situation, and must change.

A lot of people have been scratching their head as interest rates fall in the face of rising growth rates. Not so many have wondered why gold prices have fallen from 1400 dollars earlier in the year to around 1250 today, and this in the face of rising prices, some significantly higher.

The reason, in my view, is they are both forecasting a slowdown of world growth and a return to disinflation. It is what I call the recessionary/deflationary bias in the world. In spite of the present snap back in growth from recessionary levels, and higher inflation rates today, nations have not been able to shake the constant returning trend toward slow growth and weak prices just when it appears we are about to reach escape velocity. It is a force that has constantly reasserted itself over the last seven years. It is the result of a world in the process of de-leveraging.

Banks have held onto money in the form of excess reserves instead of making loans. Consumers have substantially cut back on credit card debt. Many home buyers haven't been able to get a mortgage. A large part of home sales are done in cash rather than credit today. Governments have cut back on spending which is a good thing, but with no new growth measures to offset their spending cuts. And businesses are afraid and uncertain of the future and have withdrawn into the safety of complacency. In fact for the first time in memory, more businesses are leaving the economy than being created. The result has been the longest period of stagnation since WWII.

Gold usually leads commodity price increases in general as world demand rises. It did so in the first two months of the year correctly forecasting the current higher growth and inflation rates. It also forecasts deflation, recessions, financial stress, and geopolitical turmoil. Interest rates do the same. It is not the present that we have to worry about, it's the future. The falling gold prices and falling interest rates of today are likely signaling the reversal of these trends in the future. Central bankers and government leaders should take notice.

The market is warning central banks that monetary policy is too tight. In spite of all their efforts, money is not easy to come by, it's difficult to get. The increase in money supply and the velocity of money, both of which are turning lower testify to this fact. So does the fact that it's difficult to find a job, get a loan, make a return on an investment, or expand a business.

Political leaders that claim that they are doing everything in their power to make things better have only made things worse. They have increased regulations, increased taxes and fees, fostered confusion, and instituted spending programs that can only be described as fiscally irresponsible. It should be obvious that the present policies are not working as we see unemployment rates rise in Germany and France. And here in the United States the only reason the unemployment rate is as "low" as it is, is not due to anything government has done, but due to the private sectors efforts in the energy sector that created the energy boom. Without the additional employment created in the energy sector, unemployment would be substantially higher than it is today.

The Federal government has done everything in its power to stop energy production; from holding back permits to drill, to preventing the Keystone Pipeline. Yet the Federal government brags about the falling unemployment rate and takes full credit for it.

A change in monetary, fiscal, and regulatory policy is necessary to beat back the forces of recession and deflation. If the messages of falling gold prices and falling interest rates are not enough to gain the attention of policy makers, I suspect that the specter of future falling stock prices throughout the world will be. That is what is in store for us if the recessionary/deflationary bias in the world economy that gold and bonds are signaling, reasserts itself.

If gold and interest rates continue to fall they will likely be signaling a possible slowdown in both growth and inflation once again in the second half of the year -- the exact opposite of what I expected at the beginning of the year. The boomlet we're experiencing today may be ending sooner than anyone expected. For sure, this is NOT what the Fed, the stock market, or most economists are expecting.

This can all change of course. Nothing is written in stone. New factors can intercede and change a trend-in-the-making, on a dime. Geopolitical events, a financial crisis, currency movements, etc, all have the potential of affecting the direction of markets. But this move down in gold and interest rates can't be taken lightly. If the trend doesn't change by July, I would say we are in for a distinct slowdown in the second half of the year rather than the rebound that had been forming.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TZA, GLD, GDX, DUST over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.