Gold is only worth how many U.S. dollars’ investors are willing to part with for ownership of the metal. The metal along with all commodities are priced in U.S. dollars. While the value of Canadian dollars and Swiss Francs may be important to you domestically, if you are transitioning a portion of your wealth into gold, the value of U.S. dollars at the time of conversion is key.
To that point, interest rates influence the value of money; low rates mean devaluation and higher gold prices; at least, in theory. With the key interest rate in the U.S. hovering between 0.25-0.50% investors are wondering if the Fed will hike rates, resulting in a rise in its currency, thereby driving down the value gold.
All eyes on the Fed’s June rate hike
Gold has lost its lustre in recent sessions as fear surrounding a potential mid-June rate hike by the Federal Reserve has investors rushing to the U.S. dollar. The world’s reserve currency took a breather Wednesday, falling 0.21%, to 95.39 at 1:55 PM EST.
Interest rates to push Dollar Index to 100?
With calls from an analyst at Citigroup and others that the dollar may be poised for a rally to the 100-level gold speculators have gotten cold feet. This all based on rising interest rates…
With titles such as This could send gold tumbling below $1,000 again, Citi says, published on MarketWatch this morning, it’s hard to blame them.
The mid-June meeting will be pivotal to gold’s rally and whether or not junior gold stocks can maintain their current up trend.
Back to interest rates…
The Bank of Canada kept its key lending rate at 0.5% Wednesday. This is the seventh consecutive decision to leave the rate unchanged. Funny enough, the Loonie was higher on the news as investors began to wonder if the Fed really had the conviction in the U.S. economy to raise rates.
Canada’s rates have been lower than 0.5%; back in 2009 and 2010 the key lending rate dropped to 0.25% for some time. While holding rates at 0.5% is not off the table, the central bank has made it clear that negative interest rates are not off the table.
Canada’s Interest Rate: last 25 years
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Negative interest rates still coming to Canada?
We wrote about this in a February Weekly Volume titled Negative Interest Rates Coming to Canada:
“Before calculating the odds of the Fed reversing monetary policy course, it is important to look at how central banks plan to deal with the looming global recession.
Canada’s central bank (BOC) published a white paper in December titled Framework for Conducting Monetary Policy at Low Interest Rates. The bank highlighted the success of negative interest rates in other countries around the world and explained under what circumstances such measures may be introduced in Canada. The BOC wrote that:
“At this time, the Bank’s best estimate is that the ELB for the target for the overnight rate is approximately -0.5 per cent.”
Note: ELB stands for the effective lower bound.”
Click here to read Canada’s Economic Nightmare Now Reality.
So, with conflicting sentiment between the resource-based economy of Canada and the mainly talk, little action central bank to the south of us, if a June rate hike comes to fruition, the Fed could finally be growing a spine. That’s bad news for gold investors and junior gold stocks in the short term. The Fed has to know, if it raises interest rates in June, it will be lowering them in short order as the real data surrounding the U.S. economy suggests a recession is forthcoming.
This article represents solely the opinions of Alexander Smith. Alexander Smith is not an investment advisor and any reference to specific securities in the list referred to in the article does not constitute a recommendation thereof. Readers are encouraged to consult their investment advisors prior to making any investment decisions. The information in this article is of an impersonal nature and should not be construed as individualized advice or investment recommendations.
