Interest Rates and Gold

Written By Brian Hicks

Posted September 2, 2011

Today’s employment report has far greater meaning than most investors will ever realize.

Sure, it’s bad…

A net zero jobs were created last month. The final tally failed to meet already low expectations of 60,000 net new jobs. Stocks nosedived. And it was the clearest indicator yet that the double-dip recession is already here.

However, there will be a much bigger consequence to your portfolio.

Today’s Most Important Trend

While all eyes are on the unemployment report, stocks, and the president’s upcoming jobs plan (although we already know what the plan will entail), most everyone is missing the most dominant trend affecting everything from your job to your investments and the economy.

If this trend is so important, how could almost everyone could miss it?

Simple. The most dominant trend in the markets today isn’t happening in stocks, gas prices, or on the unemployment rolls; it’s happening in the bond markets.

As you know all too well, if you are looking for investment income, interest rates are at multi-decade lows. The yield on the 10-year Treasury bond is the lowest it has been since the Eisenhower Administration. And rates are headed lower, too.

The result of low (and eventually lower) interest rates is terrible news for most financial assets. And it’s great news for a very few others.

The key to making a fortune and not losing big in the current environment is knowing which assets will be the winners and which will be the losers.

The Low Interest Losers

The losers from low interest rates are many.

Banks pay a high price in a low interest rate world. The spread between the rates they borrow and loan at get smaller and smaller as interest rates decline.

Responsible people who save and invest lose, too. If you’re a regular Wealth Daily reader, chances are you are one of them.

Your savings are being slowly inflated away. You are forced to speculate on commodities, stocks, and other assets in hopes of merely keeping up with inflation.

The Low Interest Winners

The winners are the relative few…

Large businesses win. Those which can borrow at exceptionally low rates can really get aggressive in growing their market share. Their smaller competitors — who have to pay higher interest rates because they’re riskier — are at a significant disadvantage.

Borrowers make out. Everyone who bought a home they couldn’t afford with money they didn’t have will watch their debt slowly inflate away.

Government comes out on top. The U.S. government is the best example: It can borrow money for anything — handouts, solar projects, and the rest of its myriad of boondoggles — and it will only have to pay a few percentage points a year to borrow the money.

But the biggest winners of all are gold investors. And this is absolutely critical to anyone who owns gold, or hasn’t been bitten by the gold bug…

The Most Important Thing You Need to Know About Gold

Gold prices are driven by interest rates.

All over the financial media, we hear about the declining dollar, soaring debt, inflation, deflation, safe haven buying, and my personal favorite and the most nonsensical: the Indian wedding season.

Today was a perfect example of what I’m talking about. Moments after the employment report was released, bond prices surged and interest rates plummeted. The yield on the 10-year Treasury bond fell from 2.15% to 2.05%, a sharp decline in interest rates.

Meanwhile, gold surged more than $30 in a few minutes. Gold continued its climb to add more than $50 today.

Rates went down and gold went up. This wasn’t a one-off coincidence. History shows a remarkably strong correlation between gold and interest rates.

Make This Trend Your Friend

The gold-and-interest-rate relationship has a long and highly-correlated history.

The image below from the Mine Fund shows inflation-adjusted gold prices relative to real interest rates (interest rates minus inflation):

Gold and Real Interest Rate Chart Mine Fund 

Real interest rates down, gold up. Real interest rates up, gold way down.

The correlation between gold and real interest rates is staggeringly high. And it ties in perfectly with today’s market action — and the long-term consequences of the jobs report.

It’s the Interest Rates, Stupid

Today’s bond market activity further cemented the downtrend and interest rates… and the gold bull market as a result.

In the end, today’s jobs report was anything but good. And the long-term consequences will be terrible for most people.

Buy gold. You won’t regret it.

Good investing,

Andrew Mickey
Editor, Wealth Daily

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