How many times I have read gold sector gurus working gold-bearish promotions talk about a “strong dollar” and “rising interest rates” as being bearish for gold. Transfixing certain among the gold “community” with authoritative words about gold’s drivers, they keep ’em transfixed. Some attained reputations by having been touted by ‘Mr. Gold’, Jim Sinclair and then turned around and bit the hand that fed them right off when it was time to create a cottage industry of sentiment against poor old Jim and the other gold ‘Generals’ as I used to call them during the previous bull market.
They now offer the cartoonish opposites to Sinclair’s formerly cartoonish bullish stuff. The dollar is bullish so gold is bearish… interest rates are rising so gold is bearish. Well, for different reasons neither of those statements – fed to some non-discriminating gold bug herds who lap anything, as dispensed by an authoritative figure, that fits their current view (in this case, ‘we won’t get fooled again’ bearish) – are true. It’s just paint-by-numbers stuff that is easy to digest and understand.
In the case of interest rates, they are rising. What do the newfangled gold bears have to say about that? I saw their anti gold cult ‘cult’ leader write several times that rising interest rates would hurt gold. I did not see any mention of interest rate differentials, which mean only everything where gold is concerned.
Get this, gold can benefit greatly when rates are rising, as long as the inter-bond signals are inflationary and indicative of an inflation problem. Gold can benefit when rates are dropping, as long as short-term rates are dropping harder and the implication is a flight to liquidity and risk ‘OFF’.
The reason Thing 2 in the chart below has been stable to (now) firm while Thing 1 launched upward…
…is because Thing 1 has also been steady and has gently risen vs. Thing 3 (2 year yields)…
There is no simple analysis of gold and interest rates. If someone in the mainstream print or TV media or a gold guru going on reputation (and a talent for serving easy to digest tidbits) talks about gold and interest rates in surface, linear terms it is advisable to disregard it. There are reasons that most people are not going to be on board when the time is right, and this is one of them. This stuff is fairly, but not overly, complex.
Add in the other elements involved like economic trends, psychology/confidence and okay, it’s complicated. But its doable if you keep cool and keep a working b/s detector against all of those trying to sell you analytical tidbits.