THIS MYTH ABOUT GOLD COULD BE COSTING YOU SERIOUS MONEY / CASEY DAILY DISPATCH

This Myth About Gold Could Be Costing You Serious Money

By Justin Spittler, editor, Casey Daily Dispatch

Forget what you know about interest rates and gold.

…Specifically the idea that high rates hurt gold.

That’s a myth... one that could cost you serious money in the months ahead.

More on that in a second. But first, let me tell you why many investors believe high interest rates are bad for gold. It’s a simple idea really.

• Gold doesn’t yield anything…

So it supposedly becomes less attractive when rates increase because bonds and other interest-bearing instruments pay more.

Makes sense, right? But the data tell a different story…

As you’re about to see, gold has experienced some of its biggest bull markets during periods of rising rates.

I’ll show you what I mean in a second. But here’s why I wrote this essay.

• Interest rates are surging…

And the Federal Reserve is a big reason why.

If you read last Wednesday’s Dispatch, you know what I’m talking about. If not, let me bring you up to speed.

Last month, the Fed lifted its key interest rate for the third time this year… and the sixth time since the start of 2017. This benchmark is now sitting at its highest level since August 2008.

This is a huge deal.

The Fed’s key rate sets the tone for interest rates across the economy. Other interest rates tend to rise when it does.

Today is a perfect example of this. Just look at what the 10-year U.S. Treasury has done since the start of 2017. Its yield has risen to 3.2%. That’s the most it’s paid since 2011.

• There’s a good reason to think that the 10-year yield will keep climbing…

To understand why, look at this chart. It shows the yield on the 10-year U.S Treasury going back to the 1980s.



You can see that the 10-year U.S Treasury yield has been falling for decades. But notice what happened last month…

The yield jumped above 3%. In the process, it pierced a nearly four-decade-long downtrend in yields.

This reflects a major shift in sentiment. It tells us Treasury yields will likely keep rising.

You’d think that would be bad for gold. But as I mentioned, history says otherwise.

• Let’s turn back the clock to 1971…

That year, the Fed started raising rates significantly.

In turn, Treasury yields also rose significantly. The U.S. 10-year, for one, saw its yield jump from 5.4% in 1971 to 14% by 1980.

That’s an enormous move. But this huge spike in yields didn’t crush appetite for gold like you might expect.

Instead, the price of gold surged from $39 an ounce in 1971 to a peak of $850 in 1980.

The same thing happened during the mid-2000s. This time, the Fed lifted its key rate from 1% to 5.25%. Another huge move. But once again, demand for gold didn’t diminish in the face of rising rates.

No. The price of gold jumped from $396 in 2004 to $715 in 2006. That’s an 81% move in just two years.

In short, rising rates aren’t bad for gold, like many investors believe. Of course, that alone isn’t a reason to buy gold. But consider this…

• Low rates have been one of the biggest drivers behind the bull market in U.S. stocks...

Regular readers know this all too well. But let me recap.

During the last global financial crisis, the Fed launched an unprecedented stimulus program. It’s pumped $3.5 trillion into the financial system. And it held its rate near zero for seven years.

These measures made it extremely cheap to borrow money. That led everyday Americans to rack up record credit card, auto, and student loan debt.

U.S. businesses also went on a borrowing binge, thanks to cheap credit. Just look at this chart:



You can see that the amount of outstanding corporate debt as a percentage of gross domestic product (GDP) – annual economic output – is at record highs.

Now, some companies borrowed money to build factories, buy equipment, and invest in research and development (R&D). But most of this money was spent on share buybacks and paying out dividends… both of which helped push the U.S. stock market to record highs.

But as you’ve seen today, the Fed isn’t holding rates near zero anymore. It’s hiking them – aggressively.

And that could create major problems for America’s debt-addicted economy. That’s obviously bad for stocks… But not for gold.

• Gold is a safe-haven asset…

Many investors take shelter in gold when they’re nervous about stocks.

And there are plenty of reasons to be worried about the stock market right now. So it shouldn’t come as a surprise that gold’s been doing well. Just look at this chart:




You can see that the price of gold has jumped 3% in October. The S&P 500, on the other hand, dropped 6% during the same period.

In short, gold is showing major strength relative to stocks… And that should continue, if rates keep rising.

So consider speculating on higher gold prices if you haven’t yet.

The best way to do this is with gold mining stocks. These companies are leveraged to the price of gold. In other words, the price of gold doesn’t have to rise much for these stocks to explode in value.

The easiest way to bet on gold mining stocks is with a fund like the VanEck Vectors Gold Miners ETF (GDX). This fund invests in a basket of gold mining stocks, which makes it a relatively safe way to profit from a rally in gold.