Interest Rates Rising, Gold Declining: What Am I Missing?

Echo To All submits: Market interest rates are going up, yet gold is going down. Am I missing something?

I know gold is also tied (via the market and trader psyche) to the value of the dollar. The dollar increase in value gold generally decreases and vice versa. But gold is also tied to inflation, as are interest rates.

An increase in market rates suggests the market assumes more inflation. Moreover, greater inflation promotes greater rates, which suggests a lower value for the stock market as per past earnings.

This is the thesis that I keep hearing the bears preach and the media suggest. However, the problem I have with the above thesis is that gold traders do not agree with it.

As of now, gold is saying inflation is very tame. So much so that gold is in a negative trend.

What strikes me as odd is that if inflation was a worry, gold would indicate it. Instead, we have interest rates rising to levels where they should have been, and this rise is being painted negatively due to the reason I gave above.

The fundamental picture on inflation can change in the next few days with the report of the PPI and CPI. (Note: I am expecting a higher PPI and CPI report simply because of the trend in gasoline prices over the current month compared to last month. But this should ease after this month.)

I guess I view the rise in rates as the ‘conundrum’ (as Greenspan calls it) correcting, rather than economic collapse.

Comments

[Adrian Ash:]

If higher interest rates were good for gold, it wouldn't have doubled in response to the Fed's "deflation scare" of the last half-decade. The key factor is the REAL rate of interest instead. It hit 9% before gold backed off at the start of the '80s. It went negative between 2002-05. Whether you think bonds are now a buy - and gold's a sell - depends on how you view the official CPI data. Maybe bond investors are only now getting round to asking if there's something amiss at the Dept. of Labor.

2007 Jun 14 10:23 AM

[huangjin:]

TIPS and treasury spreads are not increasing. Investors do not fear inflation.

2007 Jun 14 11:29 AM

[fredschnaubelt:]

July 14, 2007
Over the last 18 months every time there was a significant drop in the price of gold, a month or two later it was disclosed that France, Belgium, IMF or most recently, Spain sold 40 to 50 tons of gold. It's hard not to believe this has a dramatic effect in keeping gold from rising to reflect the inflationary policies of most governments. If most governments are inflating their currencies more or less in unison, it extremely difficult for the public to know without gold as a benchmark.
Fred Schnaubelt

2007 Jun 14 11:50 AM

[Phil Anthropy:]

Rising interest rates do not necessarily imply classical monetary inflation. If foreign governments diversify out of our treasuries, interest rates may rise without a weakening dollar, particularly if the Fed sells its foreign currency reserves to support the dollar or if the excess dollars are recycled into dollar-denominated commodities/futures. Unless the dollar weakens, gold should not increase in price as a currency hedge, although global demand could drive the price higher through normal market forces. Since both high inflation and deflation would have dire consequences for our economy, I think the Fed will try for stagflation. That implies to me that the dollar will weaken slowly, and that gold will increase in price slowly as well. I look for about 10% per year increase.

2007 Jun 14 03:29 PM