Friday , 19 July 2024

What Affect Will Rising Interest Rates Have On Inflation & the Future Price of Gold?

Though the stock, bond and currency markets, at the moment, are preoccupied withInterest-Rates the question of when the first interest-rate increase will happen, the real story lies in where interest rates are ultimately headed because that answer defines where stock, bond and currency prices are ultimately headed and the reality, dear reader, is that the Fed simply cannot — and will not — allow interest rates to crawl very high. [Why is that you ask? Read on!]

The above introductory comments are edited excerpts from an article* by Jeff D. Opdyke ( entitled Inflation, Interest Rates, and Why You Should Own Gold.

The following article is presented by Lorimer Wilson, editor of (Your Key to Making Money!) (A site for sore eyes and inquisitive minds) and the FREE Market Intelligence Report newsletter (register here; sample here).  This paragraph must be included in any article re-posting to avoid copyright infringement.

Opdyke goes on to say in further edited excerpts;

The Fed simply cannot — and will not — allow interest rates to crawl very high because it knows that with every tick up, higher and higher interest rates will increasingly crimp Washington’s style and that “style,” of course, is D.C.’s penchant for wanting to splurge big on buying votes by spending stupid amounts of money on stupid programs and this has put D.C.  in a bit of a bind, as you likely already know.

For more than half a century, the goobers we’ve elected to Congress have been spending our tax dollars as though they won’t live to see tomorrow and, so, what the hell: “Let’s live for today!” Now we have that $17 trillion in public debt that you always read about — and the $120 trillion in unfunded debt on and off America’s balance sheet that you don’t always read about but that is, nevertheless, all too real and, because of that, rising interest rates pose a significant challenge for the Fed and for Congress.

Consider some numbers and you will quickly understand the problem we face as a first-world nation rapidly moving toward Banana Republic status:

In 2013, America’s interest payments cost U.S. taxpayers $415.7 billion. Some commentators I’ve read have used that as proof that we’re finally getting our debt under control because

  • in 2007, interest payments were higher, at $430 billion but,
  • in 2007, total debt was just $9 trillion vs. $16.7 trillion at the end of 2013 and
  • in 2007, the average annual interest rate across all maturities of Treasury debt was 4.94% vs. just 2.02% in 2013 so
  • in 2013, we had a much larger sum of debt, but benefited from exceedingly low interest rates.

The Congressional Budget Office calculates that if interest rates move back toward norms by 2020 — meaning 10-year notes at 5% (they’re 2.4% today) and 3-month T-bills at 3.7% (they are 0.03% today) — our annual debt payments will explode to more than $840 billion, double what we’re paying now – and that implies:

  • a vicious debt-cycle in which the U.S. government must issue more debt to make debt payments, which then leads to more debt as the debt payments rise because of all the new debt needed to repay the existing debt and
  • a dramatic change to America’s tax-rate structure. The wealthy class now responsible for 39% of all federal taxes, will be forced to dig even deeper into their wallets.
  • a shrinking of the lifestyle of the middle-class, now responsible for just 3% of all Federal taxes paid, as more taxes come out of their paychecks,
  • a sudden sting of Uncle Sam’s pick-pocketing ways by the lower-middle-class, that now earns money from the federal tax system, as their tax benefits become tax obligations.

In short, America’s consumer-dependent economy would:

  • see said consumers lose a meaningful portion of their spending power to government taxation and, worse, would
  • see the increased taxes paid out flow to holders of U.S. debt, many of whom live overseas, as opposed to turning around and flowing back into the economy. We would, in essence, be working our butts off so that a debt-drunk Uncle Sam could send ever-larger sums of our tax dollars to the Chinese, the Japanese, the Russians, the Brits, the Taiwanese and others.

Ultimately, the above would be a political, social and financial disaster for Washington, D.C. and the Fed is smart enough to realize these ramifications exist.

This brings us back to the main point: the Fed’s ultimate destination with interest rates. My guess is that the Fed-funds rate, the Federal Reserve’s key interest-rate lever,

  • will not go higher than 2% and, more important,
  • getting there will take years, not months. The Fed will not raise rates in rote 0.25% step-ups over a few meetings. It might move in 0.1% increments, and it could go several months or maybe even a year between rate hikes.

In short, we’ve been stuck at near-0% interest rates for more than five years and it very well could take the Fed another five years or more to get us back toward 2%, simply because it knows that Congress has worked itself into an impossible financial situation.

Interest Rates, Inflation & the Future Price of Gold

The knock on gold is that it pays no rate of return and is, therefore, not a smart asset to own when money in the bank or in Treasury paper offers a decent yield but, when rates begin to rise, money in the bank or in Treasury paper will still offer no real yield in the future, given that inflation has begun to move up as wages now rise (a little jab to the gut from all those efforts to push minimum wages higher). That means inflation will equal or outpace the interest rates you’ll be able to earn in savings accounts, CDs and government bonds – and that is the environment that is brightest for gold. When you’re losing purchasing power just by letting your money sit in savings, CDs and bonds, gold is a godsend. Its price tends to rise in such an environmentso, do yourself a favor:

  • Do not look at the coming Fed rate-hike cycle as an opportunity, finally, to move some cash back into CDs and savings account.
  • Look at it for what it really is: An opportunity to grab gold now, at a fair price, knowing that the Fed has no other option but to keep interest rates exceedingly low for a long, long — long — time.

Until next time, stay Sovereign …
Image For Inflation, Interest Rates, and Why You Should Own Gold
Jeff D. Opdyke


* (By Jeff D. Opdyke; ©The Sovereign Investor Daily®, Copyright 2014; Subscribe here.)

Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.

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