Monday, January 25, 2010

A Contrary Opinion On The Gold/Interest Rate Relationship

It's from Seeking Alpha contributor Bruce Pile. Given the obvious inverse relationship between the U.S. dollar and the gold price, and given that currencies tend to be strengthened by rate hikes, it's no wonder why an impending Fed rate hike has gotten gold investors spooked.

However, that's only one of two possible reactions:
"Oh my, they're going to defend the dollar, I'd better sell my gold" or "Oh my, there's an inflation threat, I'd better buy some gold". Most of the commentary I've been seeing tends to be of the first type - if they start to defend the dollar, gold will go down.
In the 1970s, as Pile points out, investors acted in accordance with option #2. The overhanging question is, will they go for door #2 this time 'round?

Not mentioned is a real game-changer, one that would signal the arrival of an all-out bubble climax in gold. In 1979, gold shot up while the U.S. dollar was rising too. Since the inverse relationship between the greenback and gold is so intuitively obvious, this decoupling made for a real Bullish Derangement Syndrome until the gold bubble popped in early 1980.

Right now, no one's even suggesting it as a possibility.

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