These days the headlines are full of stories and largely meaningless numbers about stock markets, jobs reports or GDP growth ratios. Meanwhile, the most important topic at this point is generally ignored: interest rates.
Granted, interest rates may make a boring read for many people. Possibly because they can’t relate or understand their function and nature. And yet, interest rates underpin the credit cycle. They are a crucial economic factor, perhaps today more so than ever! A secular decline of interest rates, combined with accelerated monetary inflation, is coming to an end. As we reach this turning point, we will encounter significant implications for wealth management and preservation.
10-Year Treasury constant maturity rate in percent, since 1962
Source: Board of Governors of the Federal Reserve System (US); fred.stlouisfed.org
Central banks have been manipulating interest rates for a long time. However, one should not assume that they are in full control, merely adjusting them to stimulate or cool down the economy. It’s not that simple. Interest rates reflect “the price of money”. Interfering with that price has severe implications and will not work forever.
Interest rates are at historically low levels. They can’t realistically stay there forever, nor can they go much lower. The only way is up. The big question is how fast and how far up?
While some economists and central bankers consider negative interest rates a viable option, it is undeniable that they place a costly burden on savers and depositors. Moreover, due to the low level of interest rates, huge mountains of debt – in the form of government debt papers and corporate bonds - are found in the books of corporations, banks, pensions, and governments.
Any number of events, good news and bad news, can drive inflation (and interest rate) expectations up. That is when the selling and deleveraging starts. That is when the price of money will rise. That is when you will want to have positioned yourself and your wealth appropriately!
Does anybody remember high interest rates?
In 1981, nearly 40 years ago, the 10-Year Treasury rate peaked at close to 16 percent. The prime rate peaked at over 20 percent. Most financial advisors, traders and bankers don’t remember. Do you? Does anybody remember what it was like?
Yes, it may take a long time to get back to those levels and it is even possible that we never will. However, that is not the point. All you need is an increase of 2 or 3 percent to push a lot of debtors into solvency issues. An increase of only 2 or 3 percent will double the cost of financing for a lot of people. Have you considered this? Do you have a plan for that scenario? If not, you should start planning, and soon.
What will happen to the price of gold?
When interest rates peaked in the 80’s, gold and silver prices set all-time records. Back then, the price of gold shot up to about USD 850. In current dollars, i.e. adjusted for inflation, that relates to a price of USD 2’700!
We expect a similar price pattern in gold very soon. If you want to benefit from that rise and protect yourself from the damage that rising interest rates will do to stock, bond and fiat currency markets, you should consider building up your gold position in the coming months. It will be time and money well invested.
The greater the rise of interest rates, the higher the gold price will likely climb. The question is not if but when the tide turns. Investors who prepare for that change will be able to protect and possibly even grow their wealth.