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Interest Rates Will Go Up So Buy Gold Now

Interest rates are primed to rise.  According to the number 2 at the Federal Reserve, Fed Vice-Chairman Stanley Fischer, they may even rise twice this year alone!

Even if they don’t rise twice, the market is clearly pricing in at least one rise this year.  The real question is, will the Fed raise rates only a quarter of a percentage point or will they go to half a point to head of inflation?

Why is this going to have such a big effect on the price of gold?  Here we learn how the Fed waited too long to raise rates and why they are going to create the perfect situation for people to move money from stocks to gold.

The Market Is At the End Of A Bull Cycle

When the Federal reserve sank rates near 0 in 2009, and kept them there for the last 7 years, they created a raging bull market.  While the market was naturally due for a bull cycle, no one saw this unprecedented growth in stock share price coming.

S&P 500 Bull Market

The S&P 500 has been on a raging bull run for over 7 years.

At the same time, most of the rest of the world become an even more precarious investment.  Markets were struggling overseas, China’s economy has been softening for some time after decades of growth, and national debt at many developed country’s was reaching unsustainable levels.  As a result, other country’s central banks were forced to devalue their currency in an effort to hasten inflation and pay off debts and bolster their economies.  Because the value of most other world currencies were slipping against the dollar at the same time other real estate, debt markets, and stock markets were also in decline, and unprecedented amount of international money flew into the United States equity market.

This natural bull cycle, fed by massive amounts of fed stimulus and low interest rates, at the same time unprecedented quantities of international dollars were flying into the market created an amazing run.  The price of stocks have more than doubled in the last 7 years, and incredible run to be sure.  But the run is about to end.

A Precarious Top

Perhaps it is important to understand that almost every bull market in the history of the stock market has lasted for between 6 and 8 years.  We are now past year 7 and quickly approaching year 8 in our current run.  Historically speaking, the market is ready for a decline with or without a catalyst for a drop.  But what happens when you get a catalyst for a drop at the same time the natural cycle is ready to bring prices down?  It could be a violent correction for a stimulus inflated market.

What sort of  catalyst are we talking about?  How about the federal reserve pulling their stimulus?  The first rate increase in 15 years at the exact same time that the natural bull market cycle is about to end?  Does that sound like it could start a “correction” in over-inflated stock prices?  How about the improving economic situation of China and Europe?  With the US raising interest rates and improving overseas markets, it might be time for international investors to start taking profits and pulling some money from our market in favor of their own markets young bull cycles.

This is going to create the perfect storm for the stock market to decline.  Whether the correction is ultimately quick or slow, prices are primed to drop.

Investors Flock Into Gold

In order to preserve wealth, smart investors begin to move funds into gold and silver at the first signs of the equity markets stumbling.  This inverse correlation during times of declines in stock prices has proven itself time and time again for over a century.  Gold and silver have been where investors have turned for literally thousands of years to preserve their wealth.  Even on a day to day basis, when stock prices are down precious metals will usually rise.  When the stock market corrects at the same time debt markets also drop due to interest rate increases (interest rates and bond prices are also inversely correlated) you see a “double whammy” of investment into precious metals.  This could make prices rise significantly.

Gold and Silver are in a Rising Cycle

What is encouraging to the cautious investor is that regardless of what happens in equity markets, precious metals just had a massive price correction a few years ago and they are now in a cycle of rising prices.  After a couple more years of stagnation after the correction, gold and silver prices are starting to show signs of life and they have been rising steadily lately.  Normally each cycle will set a new high, higher than the previous top.  If this is the case (as has been the case for centuries of gold and silver trading) gold has at least over 50% to rise and silver has about 300% to rise.  Even if you only realize a fraction of this gain it is much better than losing money in stocks and bonds.

How To Get In

At Gramercy Gold we sell gold and silver, and facilitate IRA rollovers into precious metals so we would be remiss not to mention ways to protect your portfolio and make money investing in these metals.

One of the most common ways is to take your 401(k) or IRA, or a portion of your retirement account, and invest it in physical gold and silver.  This is a much safer play than investing in gold and silver stocks because the price of equity investments does not necessarily correlate to the price of the commodity they deal in (for instance mine performance may not be as good as expected or mining can be derailed by natural disasters or political situations).

If you have cash or non-qualified stock investments you can also invest these in physical gold and silver if you want.  Be warned that selling non-qualified stock investments will result in a taxable gain should one exist, but long term capital gains rates are pretty favorable right now and this investment may well be worth it.

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