The rock-and-the-hard-place question has been resolved…the Fed has cut rates and, if possible, things are looking even more intriguing for gold. Over the last four years, the precious metal has prospered solidly under higher interest rates—to the astonishment of many an analyst. But now that rates are heading south, what’s in store for gold and the greenback?
And could one incredible consequence be an interest rate boomerang?
Why the Fed Caved
To be fair, the Fed was in a real spot. No question about it. Raise rates and you might temporarily catch the free falling dollar…but you shove the housing industry right off the cliff. Lower rates and you help out a bunch of banks and people who probably shouldn’t have had anything to do with mortgages in the first place…but you wave bye-bye to the dollar. Perception will always be greater than reality, though, and it’s the American people’s understandable perception that keeping their homes is a far more critical issue than resolving some complicated dollar problem. That shouldn’t come as any big surprise. The great shaper of American’s perception, the media, hasn’t told the public about the real danger of a collapsing dollar.
In fact, the worst-case scenario the media has painted — and continues to paint — is that a wimpy dollar simply means overseas travel will now be a lot more expensive. Big deal. Stack that up against homeowners losing their homes, and the whole matter is an American no-brainer. So the Fed yielded to popular pressure.
But, most assuredly, the consequences of the collapsing dollar will be far more worrisome than a higher hotel bill in Paris. And, ironically enough, those consequences could start with another steep rise in interest rates.
Follow the Yellow Brick Road
Right Back to Higher Rates
It’s like we’re suddenly all stuck in the whacky world of Oz. Follow this unsettling line of reasoning (as depicted by analyst Martin Weiss, editor of Money and Markets):
One/ When the Fed made its dramatic rate cut, it signaled to the world that the dollar (which was, pathetically enough, already near record lows) was not going to be supported by the U.S. anytime soon. So the trickle of dollar selling quickly became more like dollar dumping…and when dollars are dumped, so are U.S. bonds.
Two/ Sure enough, treasury bonds plunged by more than two points in the days following the rate cut, the worst drop since September of 2003. Since bond yields move just as fast in the opposite direction, they’ve been skyrocketing lately. But, of course, the big trouble with that is…
Three/ …long-term mortgage rates follow long-term treasury yields! Yikes. That means if this dollar dumping continues, it will likely result in higher mortgage rates across the board—from sub-prime to prime.
“According to textbook theory,” Weiss wrote, “this wasn't supposed to happen! But it is happening. Why are Treasury yields surging (and their prices plunging) even while the Fed is cutting its interest rates? Simple: It's primarily because of the key factor we've been hammering away at day after day, week after week—the U.S. dollar.”
The big question is, will this dollar dumping continue? Ominously enough, U.S. bond demand was down a whopping 80% in just one month. Where it goes from here is something we’ll all have to wait and see. But if it does continue, interest rates could indeed boomerang…and boomerang with a vengeance. But, in the end, it won’t make all that much difference to gold.
Lower Interest Rates? Higher Interest Rates?
Gold is Likely Headed North Either Way
Unlike that of paper investments, the destiny of precious metals is no longer irrevocably bound with interest rates and where they’re headed.
Today, it’s more a matter of confidence.
Foreign nations are dumping dollars because, like the irresponsible teen with his first credit card, the U.S. is racking up a dreadful debt. We are, shamefully, the greatest debtor nation in the world. And, since the currency of the greatest debtor nation in the world also happens to be the world’s reserve currency, the world is quickly losing confidence.
After all, the world is holding over $7 trillion right now. And every time the dollar sets a record low against the euro and other currencies, something that’s been happening with disturbing frequency lately, the value of that $7 trillion gets eroded.
Which is why nations are hedging their dollars with gold…and why you should do the same. Julian Phillips, of goldforecaster.com wrote: “Gold has broken out of all restraints now and is an entirely new ball game after Fed President Ben Benanke dropped interest rates at the expense of the dollar’s value internationally. National interests will always override international ones. Only confidence in the U.S. economy, its banks and the ability of the consumer to spend will restore confidence in the dollar and turn gold’s price down again. Will this happen?”
Gold is your insurance in case it doesn’t.•
You’ve seen him on Fox News Television and heard him on the Rush Limbaugh Show. He’s a published author, writer and an expert guest on more than 1000 radio programs discussing today’s economy and gold. Kevin DeMeritt, President of Lear Financial, is a nationally renowned financial analyst whose insight into the future of domestic and global economies is right on the money. His book, The Bulls The Bears and the Bust, reviewed by the Associated Press, predicted the market crash of 2001 and the ensuing rise of gold to the status of best investment.
Mr. DeMeritt has made Lear Financial into one of the most highly endorsed gold companies in the country. Relying on his insightful recommendations, uncanny market trading skills, and 20 years of experience in investment quality gold, he has navigated thousands of portfolios to profitability through boom and bust times. Now more than ever, Mr. DeMeritt's insights are welcome by skittish investors.
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