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What Does Rising Interest Rates Mean For Gold?

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rising interest rates and gold

What does rising interest rates mean for gold?

There has been a lot of talk lately about golds correlation to rising interest rates. With this post we will explore what will happen to gold when the interest rates goes up.

What does it mean with rising interest rates?

Is it good or bad for gold?

The reason why there is so much talk about golds correlation to interest rates is because in December 2015 the Federal Reserve raised the interest rates for the first time in over a decade.

We’ve had historically low interest rates since 2008

After the financial crash of 2008 people were afraid that this was the end of the financial system as we know it. Money would stop coming out of ATMs, big banks would fail which would mean billions of dollars lost for average people.

It was called financial Armageddon and the Federal Reserve had to do something (although they were very much involved with creating this financial disaster) to backstop this crash.

What they did was to bail out the big banks. Instead of bailing out the millions of people that were left homeless, jobless and poor they bailed out the big banks. The people that had been taking these risky bets and accumulated so much debt that they brought down the financial system.

After the bailout to prevent the whole economy from failing there was a new big question. How do we kickstart the economy again?

What they would come up with is something that has never really been tried before in documented history. Zero percent interest rates.

Interest rates is one of the most important factors in a free market. It sets the price on risk. If I loan money from you and you charge me a 10% interest rate then that is the price you want for the potential risk that I wont pay you back.

With the federal reserve (Americas central bank) putting interest rates at zero they basically said that loaning out money had no risk to it. If you lend me money I would only pay back what I owed you, meaning that it was now “free” to loan money from you (you in this sentence being the bank).

Why would interest rates at zero help to kickstart the economy? You might ask.

Well, what they wanted to achieve was that people, corporations and governments should start to loan a bunch of money again and spend it. Because it’s now “free” to loan money this extra liquidity was suppose to be used to build factories, roads and other job creating things. This would kickstart the economy they said.

Have a look at the chart below which is the US interest rates since 1960. As you can see the average is around 5-6% but since 2008 the interest rates has been at 0%. All to fuel another bubble just like the one that popped in 2008.

US interest rates since 1970

Do you see how we have been on 0% since 2008? Compare that to before. We have never tried this experiment before and like always when central bankers try something new, it fails.

Rising interest rates will prick the debt bubble

First of all I want to say this: We had a financial crash in 2008 which almost brought down the whole worlds financial system because we had too much bad debt.

What is the Federal Reserve’s way of fixing it? By creating more bad debt! Because zero percent interest rates will do just that, create more bad debt.

Why is zero percent creating more bad debt? You might ask.

It’s fairly simple. Like we discussed above low interest rates means that it’s very cheap to loan money. Because it’s almost free to loan money more people, companies and governments will use this to maybe get a new car, buy back some of their own stock or to spend more money on the military.

This is all good as long as the interest rates are low. Because then it can be paid off. But what happens when the interests rates goes up and we can no longer afford the monthly payments on all the bad debt that we’ve accumulated?

pricking the housing bubble

The debt bubble of today will be pricked just like the housing bubble of 2008 got pricked.

This is exactly what is happening. People and organizations are buying things on credit that they normally couldn’t afford just because interest rates are so low. Once the interest rates rise a lot of these loans will default and we are back at the crisis levels of 2008.

This is just fueling another bubble just like 2008. In 2008 it was contained just to housing but it was created because of interest rates for houses were too low, lending standards were to weak and that you could move into a house with zero to none down payment.

Because everyone could easily borrow money the housing prices were bid up to unsustainable levels (forming a bubble). And all bubbles pop!

The same thing is happening right now but the bubbles are being formed everywhere.  A car bubble, new housing bubble, stock market bubble and bond market bubble.

A lot of the assets around the world are getting artificially propped up with all this cheap money from zero percent interest rates.

The bottom line is that nothing that the Federal Reserve did after the financial crisis of 2008 fixed any of the underlying problems, it only made them bigger. We still have a debt problem and we can sustain this huge amount of debt because of zero percent interest rates but rising interest rates will prick the debt bubble. The 2008 financial crisis will be nothing compared to the coming one.

Lets have a look at the US government for example. You have probably heard the stupid amount of debt that they have accumulated. It’s quickly reaching 20 TRILLION DOLLARS (let that sink in) as I write this.

If the interest rate on the national debt would go up, just to say 3%, almost half of the governments income from taxes and other things would go towards paying off the interest on the national debt.

The government would have to default directly because they could never afford to pay that amount and still pay the military, roads, social security and other obligations.

us national debt from 1980

Look at how much extra debt they’ve created since 2008? We had a debt problem and we tried to solve it by creating more debt. This is obviously unsustainable and this giant debt bubble will pop just like the housing bubble popped 2008.

Why is rising interest rates good for gold then?

I think that you have understood that after 2008 we tried to kickstart the economy by lowering interest rates to zero which created even more bad debt that was the root of the problems in 2008. We can afford to service this debt because the interest rate is so low today. But when the interest rate start to rise it will prick this giant debt bubble and we will see a bigger financial crisis than 2008.

So why would this be good for gold you might ask?

One of the biggest reasons for why people invest in gold is because it’s a safe investment. It has withstand wars, stock market crashes, empires fall and all other things you can think of and always kept it’s purchasing power.

When people see tough economic times ahead they always turn to physical gold to protect their wealth, These people will drive up the price of gold because of simple supply and demand. When more people are buying something, the price goes up.

We can easily prove this. As I said in the beginning of the article the Federal Reserve decided to raise interest rates in December of 2015. Let’s have a look at what happened to the price of gold then.

Federal Reserve raised interest rates in December of 2015 when the price of gold was around $1050/ounce. Today around 6 months after it's around $1350/ounce.

Federal Reserve raised interest rates in December of 2015 when the price of gold was around $1050/ounce. Today around 6 months after it’s around $1350/ounce.

As you can see gold had been going down for a while but when the Federal Reserve (FED) decided to raise the interest rates gold just reversed and is up around 25% in 6 months. This is a huge move for gold.

The reason why is because big investors know that when the interest rates rises the party is over and we will have a worse financial crisis than 2008. By buying gold they will protect themselves from the coming crisis.

The interest rates will go up on day. Either by the central banks pushing it up themselves (not very likely because they know that will pop the bubble) or by market forces. But interest rates will not be able to stay at 0% for ever and asset prices will not continue to rise for ever.

As I said, when the interest rates rises the party is over. If you stand holding only paper assets by then you will have a very hard time. Move some of you assets into physical gold today as a protection against the coming economic collapse.

See it as insurance on your money. Just like you have insurance on your house you should have insurance on your money. You do this by putting between 10-20% of your investment capital into physical gold bullion.

Please leave a comment below if you have any input. I love to talk about this stuff so don’t hesitate. Otherwise you should have a look at my top 3 reasons for why you should start to invest in gold today.

Click the button below for my top 3 reasons to invest in gold today

Why Should You Invest In Gold?


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16 Comments

  1. Marcus, thank you for this informative post on gold and finances in general. I learned more from you than I did in a college course I attempted on finances. I always pondered on the zero percent loan idea/concept and wondered if that was a smart thing to do and how it would work. Thanks to you, I have a better understanding now.

    I have fallen prey to the low-interest rate idea, but, now I understand how it could be a bad decision because the interest rates are not guaranteed to remain low. Thank you.

    • Thanks for the nice comment Josephine.

      I have always tried to put a complex idea like low interest rates and make it easier for people to understand. There is this misconception in the world today that the only people that are allowed to talk about the economy is people with high education. A lot of the things are actually based in common sense. The Financial media is trying to make it more complex because if the average Joe knew just how screwed up our financial system really is I don’t think that it would take long until an uprising.

      We are getting tricked into taking on huge amounts of debt because it’s low interest now. But just as I was talking about, the interest rates wont stay low for ever. When they reset there will be a lot of bad debt that will default.

      Marcus

  2. You’ve got a really informative post here Marcus. I remember the crash in 2008, but I wasn’t really worried about it because I was still in school at the time, and I had financial assistance from my family. Now that i’m working, I can definitely see how gold would be a good investment choice. Especially with the interest rates going the way they and the probability of another meltdown like before. Thanks for the great info!

    • Thanks for the great comment Pete.

      During the financial crash of 2008 I lost almost half of my equity because I had my money in mutual funds. That was somewhat the turning point for me. I said “How can it be that I lost half of my hard earned cash in less then a day?”. That sounded super risky to me and I started to do research on why the crisis of 2008 happened and how you could protect yourself from one in the future.

      In fact, every 2-9 years there has been a recession in the US. We are due for another one again if history should be any guidance. Don’t be wiped out by having your money in just paper assets. Allocate 10-20% of your savings into physical gold to be protected.

      Marcus

  3. This article is so thorough and detailed. I love reading any article about the rise and fall of interest rates. The financial crisis in 2008 was such a big shock and the housing bubbles shook off any single part of this economy. Luckily, it started to bounce back these years and hopefully, could regain to the point where it was before. And it’s an interesting point to say that rising interest rates can do good to gold because it’s safer to keep it and protect our wealth. Thanks for sharing, Marcus!

    • Thanks for the comment Jasmine.

      Yeah 2008 wasn’t anything fun at all. A housing bubble in the US almost took down the world economy. I don’t believe that we have fixed any of the problems from 2008 though. I truly believe that we have just made them worse and that a new economic crash is on the horizon.

      In 2008 the US government wasn’t that indebted themselves and were able to bail out these failed banks. This time around though the government will not be able to bail out the banks. There are talks about bail ins (do a google search for it). But basically what it means is that the bank will take depositors money (your savings account) in order to not go under.

      Don’t keep all you savings in a bank account, it is extremely risky. Take some of it out (10-20%) and put it into physical gold.

      Marcus

  4. Wow, you’re really knowledgeable in not only gold but in the market as well. you really go in depth on how the market works and how the interest rate fluctuations effect gold prices. Thanks for all the free information. I’ve actually heard you are supposed to put 5% of your income into gold. You recommend 10-20%?

    • Thanks for the nice comment Matt.

      The amount of gold in your investment portfolio is completely individual and there is no right or wrong. The people saying that you should only have 5% in gold are often high net worth people. Because remember, gold doesn’t have a yield. You will not get a paycheck every month because you own gold.

      That’s why a lot of high net worth people “only” have 5% because a lot of their money is out there getting dividends. Personally I think you should have 10-20% in gold because of our current economic system. It’s not sustainable and if history is any guidance then gold will do great in an environment like this.

      Also, I think that if you do not have that much money you should build up your savings before you build up your investments. If you put more in gold in the beginning you can then start putting less into gold every month and look for other dividend yielding assets.

      Remember though, gold is your safe haven. The money you have that no matter what happens in the financial system and so on you won’t lose. This means that if you would lose all your paper assets in a financial crash you still have 20% of your net worth left (probably more because gold will go up in a financial crash).

      This is something you have to decide for yourself. But all serious investors agree on one thing. Every healthy portfolio should contain soem physical gold. How much is then up to you. Personally I have 20% because I also think that gold will gain a lot in value over the coming years. So I see it as a good investment at the same time as it the safe haven for my wealth.

      Marcus

  5. This was a very interesting article. I have long been hearing that when interest rates goes up the debt bubble will burst. This made so much sense of why.

    It’s crazy to think that we can just keep on expanding our debt (borrow from the future) without any consequences.

    What can make the interest rates go up?

    • Thanks for the comment.

      I’m glad that I cleared up some of the thoughts you had of why the debt bubble will burst when the interest rates goes up. You’re definitely right in that the current economic system is unsustainable.

      For me I see two ways that the interest rates will go up:

      1. The federal reserve raises interest rates to rain in inflation (very unlikely). The path that we are on right now will create massive amount of inflation at one point. It’s inevitable that when you create this much amount of paper dollars inflation will come. If the inflation goes up to much the FED will have to raise interest rates to above the inflation rate. The only problem then is that they will prick their debt bubble themselves. This is why I don’t think they will do that.

      2. The market forces will make the interest rates go up. Right now a lot of people still think that the US is solvent and that it can pay back it’s $20 TRILLION in debt at some point. There’s a lot of foreign investment in the US and when people wake up to the fact that US is bankrupt they might start demanding higher interest on their loans to the US because it’s riskier. This was what happened to Greece for example. This is more likely although the FED can technically just create more money and loan it to the US government if foreign investors stop.

      The FED can right now keep interest rates low by artificially pumping in liquidity in the markets and to pretend that the US economy is doing fine. But more and more people start to realize that the US is bankrupt. Once people have realized that there is only two options for the US.

      1. Legitimately default on the debt. This is very unlikely, I mean do you really think that the politicians will stand up and say “Sorry folks, we have defaulted the country. But please vote for me again”?

      2. Hyperinflation. The FED will just keep ignoring the problem and create more and more money to pay the bills. This will eventually create a hyperinflation like we see in Venezuela now for example. This is what I believe will happen. If you want to look into the future of the Western world. Look at Venezuela right now. When we stop printing money to pay for the bills that’s what’s going to happen.

      Marcus

  6. Great article on the financial state of what has been and what will be coming. The economy has had some major shifts as you have mentioned and there will be some big surprises for many to come. They really should not be any surprise but because of the information the banks and government-run things it will come across that way.

    Gold and silver have always been the default currency source if you want to consider it that way and what you say makes perfect sense.

    What is your take on the Bitcoin looking to get into the financial stage?

    • Thanks a lot for the comment.

      Yes for over 5000 years gold and silver has been the way that people store their wealth. The reason why it’s not salt (have been tried as money in the Roman Empire) for example is that gold and silver can withstand the test of time.

      All other substances on earth become affected by time. Steel for example start to rust, milk will go bad and so on. But the same gold that the Egyptians were using in trade 5000 years ago are still with us today and still purchases something.

      That’s why gold is such a perfect store of wealth. Because it doesn’t go bad.

      My take on bitCoins is that it’s an awesome technology. It’s trying to be exactly like a free market without any regulations. I’m a big proponent of free markets and that the government and institutions should stay out of free trade. If two parties wants to make a transaction it’s a win-win (otherwise they wouldn’t exchange). Who is the government to say that a win-win situation can’t happen?

      I think we will see crypto currencies become a thing of the future. I’m just not sure if bitcoin will be the one. Right now it’s very volatile and you do not want that as a store of wealth. I know the currency is young but it’s definitely in the right direction.

      You should only have around 10-20% of your assets in physical gold. Maybe put another 10-20% in bitcoins? I do not suggest you put all of your money into bitcoins because it’s very volatile and the governments and banks hate it and unfortunately they have tremendous power nowadays to make it illegal.

      Marcus

  7. A well put together article which offers real solid reasons for investing in gold in these troubled financial times. I also agree that gold bullion should just be one part of a mixed portfolio of quality investments to protect the value of our assets. Owning a mortgage free home should however be top priority to ensure you at least have a roof over your head should all your paper assets become worthless in a financial crisis.

    • Thanks a lot for the comment James.

      I agree with you that it should be a part of your portfolio. If you are able to own a mortgage free home then yes definitely. Only problem is that it’s not an easy task today. The housing prices are up again at bubble territory so to buy your house straight up if you do not have a lot of money is not going to happen.

      I would be very cautious in these times to own any paper assets. Especially in the west (US, Europe) because we are at extreme economic times and this ticking time bomb could explode tomorrow and you would be left holding paper.

      Personally I try to just invest in tangible assets. Things that I can touch and feel (land, houses, gold, silver, art) and so on. Or I have assets outside of the West (Singapore, New Zealand,…) and so on. But buying a house right now feels risky to me. Although you’re right. You will need a roof over your head.

      Thanks for the great comment.
      Marcus

  8. Hey Marcus, this is David. I love this post. I posted up a video recently about a related topic concerning the Federal Reserve on my Facebook. My friends and I also discussed the gold standard in the comments. If you ever want to engage there, here is the link:

    http://bit.ly/2aB9uPQ

    Also, I was an econ major in college, but all I remember is that I was so confused when they told me that the Phillips Curve indicates that inflation and unemployment may or may not be inversely related and I was like… ummm.. huh?! LOL I really don’t deserve my bachelor’s degree.

    Call me a conspiracy theorist but I don’t think we (Americans) need a Federal Reserve. Again, if you can also engage on my comments section, especially for my friend, Drew, who’s skeptical about the whole issue, I would actually love that.

    Anyways, I already love your website, brother. Keep it up and will definitely be staying in touch.

    David

    • Hi David and thanks for the comment.

      I will surely look into your comments because I’m on the same side as you. I don’t think we need a Federal Reserve. Although going back to before the federal reserve when every single bank had their own gold certificate notes would be a good idea either. The FED was good for one thing and that was that you could deposit your gold in California and get a Federal Reserve GOLD note and then retrieve gold in New York with that note.

      Before all the banks had their own notes so if you wanted to get your gold out again from New York you would have to travel to California (where they accepted your notes) and get your gold back.

      I’m not a econ major what so ever. Economics have always been an interest of mine and I have been reading a ton of books on the subject. I believe in Free markets and sound money. I would call myself an Austrian economist.

      Our school system today is teaching out the failed way of keynesian economics. This is the system that we are on today and it clearly doesn’t work. I love people like Ludwig von Mises and Murray Rothbard instad.

      Thanks again for connecting and we’ll keep in touch.

      Marcus

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