NEW LOW OBSERVER

Gold and gold stocks continue to languish as there appears to be no catalyst to propel prices higher. 

The perception of no reason for gold to increase adds to the despondency of traders and investors which compels selling.  However, we’d like to point out that in spite of the conventional wisdom, the prospect of an interest rate rise is the biggest unambiguous reason for gold to increase in value.  While a Fed rate increase is what everyone is waiting for, history suggests that Fed policy  (government regulated) follows short-term Treasuries (market driven).

In a barely perceptible way, the chart above demonstrates that all Federal Reserve rate increases were preceded by a rise in the 3-month Treasury.  The blue arrows indicate the reversal in the declining trend before 3-month Treasuries increased.  From this point, we can easily see that the Federal Reserve’s discount rate follows to the upside not long after.  We’ve only included the point in the interest rate cycle that corresponds to the phase that we are entering, coming from an all-time low to an eventual all-time high.

The price of gold cannot sustain a rise in the face of deflationary forces, which typically brings interest rates down.  As the cycle eventually turns, we will see a sustained increase in the price of gold (with the obligatory volatility).  Analysts will argue that it is not possible for the price of gold to increase in the face of rising interest rates, however, the period from 1948 to 1981 is exactly when gold had its last massive bull market (based on foreign free market price of gold from 1948-1971; U.S. price of gold from 1971-1981).

Gold Stock Indicator