Gold May Fall On ECB Rate Rise But Rising Interest Rates Likely To Lead to Much Higher Prices

Tyler Durden's picture

Submitted by Gold Core

Gold May Fall on ECB Rate Rise but Rising Interest Rates Likely to Lead to Much Higher Prices

Gold’s two consecutive days of nominal record highs have seen some profit taking as oil is flat, the dollar is marginally higher and the euro has fallen. The ECB’s 0.25 % interest rate hike may lead to further profit taking today but rising interest rates in an increasingly inflationary environment will be positive for gold as it was from 1965 to 1981 (see charts below).

Cross Currency Table at 1130 GMT

Gold in euros – 1 Year (Daily)

It is only when real interest rates turn positive (nominal interest rates are again above the nominal rate of inflation) that gold and silver’s secular bull markets may be challenged. Inflation in the eurozone is 2.6%. Today’s interest rate rise will leave eurozone interest rates at 1.25% well below the 2.6% rate of inflation meaning that savers continue to lose out due to very low yielding deposits.

US 10 Year Government Bond – 1965 to 2011

Similarly in the US, the cost of consumer goods and services has climbed 2.1% (as measured by the CPI) over the past year while Ben Bernanke has kept interest rates at 0% for over two years now.

These inflation numbers are official government statistics and are subject to hedonic and other peculiar statistical adjustments which underestimate the real rate of inflation as being experienced by the public who are feeling the pinch from rising food, energy, insurance, healthcare and other costs. 

Gold Adjusted for Inflation (Urban Consumers Price Index)

Negative real interest rates will likely lead to precious metal prices continuing to rise or rather very low yielding fiat currencies falling in value versus non yielding finite gold. Rising interest rates are bullish for gold also as they may see the primary asset classes of equities, bonds and property come under pressure again.

The safe haven, inflation hedging, liquidity and diversification benefits of gold have never been more needed by the investment and savings public.

Gold’s Two Consecutive Days of Nominal Record Highs Ignored by Non Financial Media

Despite this need for gold as a safe haven and diversification to protect from inflation and negative real interest rates, most of the non financial media has ignored and barely reported gold’s record nominal highs in recent days. Despite, incredibly uncertain geopolitical and macroeconomic conditions facing people internationally.

In the same way that sections of the media ignored and downplayed the risk posed by debt, derivatives and property bubbles prior to the subprime debt crisis and bursting of various property bubbles, so today the monetary and macroeconomic risks and the risks posed by inflation to the public and our economies are being downplayed and largely ignored.

What little coverage there is of gold, continues to often be slightly biased with negative terminology such as “gold hits new peak”, “gold peaked today”, “investors piled into gold”,  “investors flock to gold” and “speculators hoard gold”. All of which are factually inaccurate and misleading.

Headlines regarding “gold peaking” have abounded since gold rose above $700/oz. Given our inability to forecast the future movement of any asset it is always best not to predict if something has ‘peaked’  - especially in a headline.

Also, many journalists continue to fail to report the important fact that the record highs are nominal highs and that adjusted for the significant inflation of the last 31 years, gold remains well below its inflation adjusted high of $2,400/oz.

The primary indicators of investment demand for gold - the Commitment of Traders (COT) data and Total Gold ETF Holdings continue to clearly show that little or no one is “piling into” gold – not even the speculators.

It is interesting that such negative terminology is rarely used with regard to equities and bonds – especially as bonds are likely the largest bubble in the world today.

When the non financial press cover gold they often quote bankers, stock brokers, CFD providers and other financial service providers warning about gold and suggesting gold is a bubble and is risky. It is interesting that these same individuals never advised their clients to own gold but now they believe they are experts on the gold market and can advise people not to buy or to sell.

Instead of urging diversification, they give simplistic reasons as to why gold may or “will fall”. Diversification is what they should have been advising for years and their clients would be in a far better position if they had.

Since gold rose above $800/oz in 2007 there have been umpteen definitive statements that gold was in a “speculative” bubble and would fall.  If I had an ounce of gold for every time I have heard such “experts” warn regarding gold being a bubble, I would be rich as Croesus.

To be fair, it is likely that part of the reason for the very limited coverage and somewhat negative treatment of gold is that some journalists and editors genuinely believe that gold is a speculative bubble. They may be being cautious after the experience of recent bubbles when much of the media failed to warn regarding, and indeed cheer led, recent equity and property bubbles.

They are right to be cautious in this regard. At the same time, they have a duty to report all of the facts in a non biased manner and to offer a plurality of opinion regarding all markets – including the gold market. Focusing on any one asset class and ignoring others is a failure to report the markets.
Lack of knowledge regarding financial markets, investments and savings is detrimental to the wealth of individuals, families and nations. In the coming years many will look back at the lack of and biased coverage of the gold market and wonder as to how it could have been so biased and myopic.


(Bloomberg) -- Gold 2012 Forecast Raised to $1,650 From $1,200 by Standard Chartered

Gold will average $1,650 an ounce next year, compared with a previous forecast of $1,200, Standard Chartered Bank said in a report today.

(Bloomberg) -- Russian Currency, Gold Reserves Advance $500 Million in Week

Russia’s foreign currency and gold reserves rose $500 million in the week to April 1 to $504.5 billion, the central bank said on its website.

(Bloomberg) -- Vietnam Banks Reduce Rates on Gold Deposits, Tuoi Tre Reports

Some Vietnamese banks have reduced interest rates on gold deposits as the central bank has restricted gold lending, Tuoi Tre newspaper said, citing banks. Vietnam Export-Import Commercial Joint-Stock Bank cut rates to as low as 0.2 percent for deposits with terms of six months or longer. Viet A Commercial Joint-Stock Bank also decreased rates to as low as 0.5 percent for six-month deposits.

(Bloomberg) -- Gold Declines as Rally to Record, Interest Rate Rise Spur Sales

Gold declined on speculation that investors are locking in gains after the price rose to a record earlier, and as central bank efforts to combat inflation curbed demand for precious metals.

Immediate-delivery bullion fell 0.4 percent to $1,454.35 an ounce at 2:25 p.m. in Singapore. The price gained to a record $1,462.35 earlier. Gold for June delivery in New York decreased 0.2 percent to $1,455.30 an ounce after reaching an all-time high of $1,463.70 yesterday.

“Some traders are taking profits after the recent rally to record prices,” said Park Jong Beom, Seoul-based trader with Tongyang Futures Co. “Policies to raise interest rates are also weighing on sentiment a bit.”

China raised interest rates this week for the fourth time since mid-October before a report that may show consumer prices climbed last month at the fastest pace since 2008. Federal Reserve Chairman Ben Bernanke this week said inflation must be watched “extremely closely.” Minutes from the Fed’s March 15 meeting, released yesterday, show dissent on maintaining programs intended to stimulate growth.

The U.S. has kept its benchmark interest rate at a record low since December 2008. Rising interest rates tend to increase the cost of holding non-interest-bearing commodities.

Gold climbed to a record this week as fighting in Libya, Japan’s nuclear crisis and concerns about European debt boosted demand for the metal as a protector of wealth. Bullion is up 2.4 percent this year, after jumping 30 percent in 2010 as investors sought sanctuary from currency debasement and accelerating inflation.
‘Still Favorable’

Gold will average $1,650 an ounce next year, compared with a previous forecast of $1,200 an ounce, Standard Chartered Bank said in a report today.

“The current climate is still favorable for precious metals,” Eugen Weinberg, head of commodity research with Commerzbank AG, wrote in a note to clients. “Continued unrest in North Africa and in the Arab world and the debt crisis in eurozone peripherals are fuelling price speculation.”

The U.S. and Italy are each considering arming Libyan opposition forces to speed the ouster of Muammar Qaddafi, according to an official involved in closed-door talks between Secretary of State Hillary Clinton and Italian Foreign Minister Franco Frattini in Washington today. In Japan, workers at the damaged Fukushima Dai-Ichi nuclear plant are pumping nitrogen into a reactor to prevent a possible explosion.

Portugal will seek a bailout from the European Union after the nation’s political crisis helped push borrowing costs to record levels and forced it to become the third euro-region country to need rescuing.

Cash silver fell 0.7 percent to $39.29 an ounce after climbing to a 31-year peak of $39.7625 an ounce yesterday. Palladium for immediate delivery lost 1.3 percent to $776.25 an ounce, while platinum shed 0.7 percent to $1,780.50 an ounce.

(Irish Independent) Oil and gold surge ahead of likely hike in ECB rates

OIL, gold and other commodities surged yesterday ahead of an expected rise in European Central Bank rates today.

Oil price futures to be settled in May surged to a 30-month high of $122.49, with gold hitting an all-time high of $1,459 an ounce.

The euro jumped to a 14-month high, due to a decline in the dollar, as markets bet that the 23 members of the ECB governing council would push through a 0.25pc rise in the base rate to 1.25pc.

This is expected to be just the first in a string of rises in the coming months.

Investors bought commodities and the euro because they feel the interest rate rise will depress international growth. They also think the ECB rate rise will not have its intended effect of dampening inflation in the 17-member eurozone.

A string of economists and investment banks lined up to condemn the expected rate rise as a policy blunder, for Ireland, Portugal and Greece.

A study by giant Swiss bank Credit Suisse concluded that interest rates in Ireland, Portugal and Spain should fall rather than rise.

However, because Germany is booming, a rate of plus-4.5pc would be more appropriate in that country, researchers said.

The findings, under what is known as the Taylor Rule, are based on a calculation of what is the most appropriate interest rate given inflation and growth.


Bloxham economist Alan McQuaid said the the weak periphery countries of Greece, Ireland, Portugal and Spain were extremely vulnerable to monetary tightening.

"Floating rate mortgages are a big issue in Ireland and Spain and tighter ECB monetary policy will do little to help already hard-pressed households.

"An even bigger problem for some peripheral states like Ireland is their weak banking sector.," he said.

Some 85pc of mortgages in Ireland are variable, compared with 15pc in Germany. Yesterday, the IMF warned about the dangers of variable rate mortgages. It said variable rates, including trackers, were usually lower than a fixed-rate loan -- at least at the beginning.

But when rates go up, the heavily borrowed become financially distressed, with consequences for the whole economy.
Variable rate loans -- whether they are trackers or standard variable loans -- are the norm in Ireland, the UK and Spain.

But elsewhere in Europe and in North America, long-term fixed rate loans are more common and so there is less disruption from interest rate hikes.

The ECB will raise its main refinancing rate by a quarter-percentage point from a record low 1pc today, according to all 57 economists surveyed by the Bloomberg news agency.

Germany's factory orders increased in February more than forecast, advancing 2.4pc after rising 3.1pc in the previous month, the Economy Ministry said. The rise will give further reason for the ECB to feel it necessary to raise rates. - Charlie Weston Personal Finance Editor

(Reuters) - PRECIOUS-Gold slips from record; ETF holdings lowest since May

Gold ticked lower to hover below a record on Thursday ahead of an expected euro zone interest rate hike, while ETF holdings dropped to their lowest in almost a year as investors shifted some of their money into other markets.    

Despite selling in the physical market, bullion was still supported by inflation concerns driven by the deadly unrest in Libya and the Middle East as well as soaring food prices. Silver barely moved after hitting a 31-year peak on Wednesday.        

Spot gold eased $2.31 to $1,454.69 an ounce by 0607 GMT, after striking a record of $1,461.91 on Wednesday as the U.S. dollar slipped to a 14-month low against the euro.    

Gold is far below its all-time inflation-adjusted high, estimated at almost $2,500 an ounce set in 1980 as a result of heightened geopolitical pressure and hyper inflation.   

"Moms and dads are moving out, out of gold and into the equities. But our expectations for gold moving higher has more to do with inflationary concerns, I think, particularly in China," said Jonathan Barratt, managing director of Commodity Broking Services.   

"Market is looking at not just oil, it's looking at food and I think that's important, particularly when corn reached a record high. Expectations are that foodstuff will continue to rise."        

Spot silver hardly changed at $39.30 an ounce, within sight of a 31-year peak of $39.75 struck on Wednesday. The European Central Bank is poised to raise interest rates from a record low 1.0 percent on Thursday and more is likely to follow but, fearful of heaping more pain on the euro zone's stragglers, it will give few clues about when the next move will come. [ID:nLDE7351QH]   

The euro was down a quarter point on the day at $1.4297 , having risen to $1.4350, its highest since late January 2010, on Wednesday, while Japan's benchmark Nikkei average closed  up 0.1 percent at 9,590.93.     

In the grains market, Chicago corn futures edged up to near record highs as thin U.S. stocks and expectations of firm Chinese demand helped purge early losses ahead of key U.S. data later this week.     

"There's some profit taking at the high end. I think people are shifting money into stocks because the U.S. economy seems to be improving. I don't think the ETF is giving you better returns," said a bullion dealer in Hong Kong.

"Also I think the gold market is moving too slowly after reaching the high."     

In Singapore, a centre for bullion trading in Southeast Asia, dealers noted sales of scraps from Thailand and Indonesia as holders cashed in on bullion's rise to a record.   

The world's largest gold-backed exchange-traded fund, SPDR Gold Trust , said its holdings fell to 1,205.467 tonnes by April 6, their lowest level since May last year, from 1,212.745 tonnes on April 5.    

U.S. gold futures for June fell $2 to $1,456.5 an ounce. Gold's volatility index dropped more than 2 percent on Wednesday, suggesting that the market was not expecting wild price movements in the future.   

Brent crude dipped on Thursday after five straight days of gains on concern that rising prices will hurt demand from the world's top oil consumers the United States and China, but unrest in North Africa and the Middle East cushioned the fall.

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Harlequin001's picture

These guys must be pissed...

and gold plunged on this news to ....$1,459.60...

Someone find me a tall building...

Moe Howard's picture

My desktop gold and silver price gadget just displayed a GOLD PRICE PLUNGE to $1460.30!!!

Based on that and the price of silver, $39.56, I am about to jump out of my basement window!!

Harlequin001's picture

and head swiftly and unswervingly down to the pub for a commiseratory pint...

try not to sprain your ankle when you land...

there's a good chap.

All is chosen's picture

Strange kind of profit taking, my gold charts are pointing firmly upwards.
Must be another parallel universe glitch.

Ray1968's picture

Gold must have priced in the rate hike.... just like the stock market prices everthing




youngman's picture

I don´t think people are going to dump gold and silver for rush to EU might in a NORMAL economy...but baby this isn´t normal with what is going on and going to happen to the central banks and the governments behind them....

blindfaith's picture

Hey...what about Tulip Bulbs????  Is it to late to get in on that.  I mean isn't it time that cash rotated in to them?

"but baby this isn´t normal with what is going on and going to happen to the central banks and the governments behind them"

Suggested reading:

Moe Howard's picture

AAPL & NFLX are the current 'tulip bulbs'. I recommend selling all Au, Ag, and Pb to me and invest the wonderful Federal Reserve Debt Notes I will trade you into these two perfect profit generators.

As to the Pb, please make it in the form of 5.56 & .40 S&W. Thank you.

Harlequin001's picture

Yeah, thanks for that.

Nice to know there's always someone out there looking out for my best interests...

Forgot how diffficult it can be wiping my backside with a gold bar whereas Federal Reserve notes are just so much softer, stronger and very, very long...

Moe Howard's picture

NP, I got your back brother.

LoneStarHog's picture

Profit Taking? ... Then why in the hell did the Open Interest go up 20,941 CONTRACTS? ... The friggin' corrupt banksters are shorting the hell out of gold ... ProfitTaking? ... Just more GoldCore BULLSHIT!


Why don't you post data from a CREDIBLE organization that does not have its cranium up its rectum on a daily basis?

Harlequin001's picture

well, I'm going to buy a long contract, just to piss 'em off...

Al Gorerhythm's picture

In the coming years many will look back at the lack of and biased coverage of the gold market and wonder as to how it could have been so biased and myopic.

As a starting point in their case studies, may I suggest to those future historians, that they start their investigation with the abject neglect by The World Gold Council, as 5th column insiders, who were supposed to represent gold to the world as a traditional monetary safe haven, rather than being a promoter of ear rings and bling as the primary objective of their business model and whose interests they represented.

lsbumblebee's picture

Gold may fall in euros, but there's no reason it should fall when priced in US dollars, except of course for "this, that and the other thing", not to mention gold is in a bauble, etc. 

All is chosen's picture

Oops. crash dive, but why, surely the rate rise priced in?

& what an awful thing to do to a baby banana republic the day after it asked for help. So much for European 'unity'.

Twindrives's picture

Euro, U.S. Dollar, Mainstream Media, Washington D.C., Barack Obama.........they all lie and they all suck.   Fook' all these Mofo's. 

tomster0126's picture

Gold, gold, gold.  never goes out of style.  invest in it and you're set for life!

youngman's picture

short drop...but coming back....the wave traders missed the ride....surfers...thought they could catch a downdraft....didn´t they went back long...

tek77blu's picture

good interview yesterday with Bob Chapman on Gold, Silver, and mining shares:

au_bayitch's picture

"Moms and dads are moving out, out of gold and into the equities."

WTF? Exactly what % of moms and dads own PMs? What % own equities?

Standard Chartered Bank revising by 30%. When did they make the $1200 call?

The commenters on ZH are better than these talking heads on CNBC and so-called professional financial writers and commodities experts.

Snidley Whipsnae's picture

A rate hike by Fed that is short of real inflation rate will not hurt PMs.

Fed is now jawboning a stop of QE and if they do abandon QE they will wait a while to see what happens to the economy. Fed will quickly start QE again if it becomes evident that economy is tanking without QE. QE 3 is probably coming after a pause. Rate hikes still over the horizon.

Clear sailing for PMs. BTFD if there are any.

johny2's picture

The FED is intentionally devaluing dollar, and everybody knows it. The whole ponzi scheme runs on the misguided confidence...Once everybody realises that the printed dollar promises are going to become worthless, PM are going to become very scarce and expensive.

spartan117's picture

Regular unleaded up to $4.20 here in Southern California.  Up 10 cents in 4 days.

falak pema's picture

what about the irradiated Fukushima variety? IS there a premium for uranium enhanced regular? Maybe Benocide has a mad plan to irradiate gold and silver and thus make it physically inaccessible to small traders...its all for the big boys...who come inspect it in their decontaminated suits...that'd be a twister...

LRC Fan's picture

Quick question-how/where does everyone store their gold/silver?  I think keeping 100% of it in physical is a great idea, but I also think keeping it all at home or in one spot is very dumb.  I'm considering putting some (maybe 25%) in a bank safety deposit box, but I'm a bit nervous as to the government's ability to simply clear me out or shut me out when things get bad.  I think keeping something like 90% quarters or 40% halves is smarter than gold because you can at least claim that you want to go spend the money on gas or something at face value and they might buy it. 

I have a bunch of ideas about where to hide my coins around the house (bag them up, put them in a half used paint can is a good one.  Or tape them under a kitchen table.  etc etc).  But then if there's a fire or flood you might get screwed.  Burying them is another idea, but I don't really know how to do that without making a mistake and having someone find out.  Should I just buy a safe, bolt it to the floor, and rest easy?  I've been reading that even that is not foolproof as robbers can simply come in and take it out on a 2 wheeler.  Doug Casey's site advocates that you hide your safe which to me is just complicated since I suck at putting things together/moving big things around. 

I also have some boxes of nickels...

H. Hoover's picture

A coffee can buried in the back yard has its charms.

JonNadler's picture

do we all want to disclose where we keep our gold now? Sure put out the best hiding places for it to become common knowledge so the govenment goons will know where to look.

I hide mine under the toilet seat. You have to lift the seat to get to it. You may get a pile of s*** splashed in your face

Moe Howard's picture

My problem is that every time I get some Au & Ag together I try to row across the Ohio River to Indiana to bury it, and a barge comes by and swamps my rowboat, plunging my PMs to the bottom. I keep getting zeroed out. I have had so many boat accidents that I currently have no PMs, except for some Gold Eagles I just bought this weekend and are in transit. I may try to get someone else to row me across with a better rowboat this time.

DivisionBell's picture

Where do you store your lead?  Birds of a (dense) feather, flock together...

JonNadler's picture

Please check out my new site, we hired a blonde chick to "inteview" me (since not even CNBC will have me in  as an expert anal-yst anymore)

Hey she's not that Erin chick from CNBC but she looks pretty good to me. I even pretend to have wires hooked on to me, even though the chick is right next to me.

Harlequin001's picture

Yep, and if that doesn't work you can always turn the volume off and pretend she's talking dirty...

Moe Howard's picture

Too much bass at the beginning, my Bose sub made my legs vibrate and shook my pistol right off the desk. Good thing it wasn't loaded. The interview was good, though, thanks. Keep up the good work.

Auricle of Omaha's picture

Moe, almost brought tears to my eyes laughing at that one!

monkeys.pick.bottoms's picture

Mr. Turk says gold backwardation will be the ultimate sign of the end game. From my neck of the woods: the 1 oz gold coin (with certificate) that you used to buy in any major branch of the Polish National Bank has been sold out for some time now. It's available from private dealers at higher prices. Also the National Bank shows gold prices converted to the local currency that do not price in the latest gains at Comex. The price for some time now has been more and more phoney. Greetings from otherwise boringly peaceful part of the world (so far...)

Moe Howard's picture

My mother-in-law is in Wroclaw, my wife was asking me the other day if she should purchase gold and silver from the bank in Poland like my father-in-law used to before he died last summer. I guess from what you just wrote gold is out of the question. How about silver?

Pool Shark's picture
Euro May Fall On ECB Rate Rise But Rising Interest Rates Likely To Lead to Much Higher Prices


Fixed that for ya Tyler...


Bansters-in-my- feces's picture

I call bullshit reporting.....

Youri Carma's picture


From Interview at King World News on 7 April 2011 Marc Faber:

Long interest rates move in long cycles so we had a cycle low in the 1940-ties when the 10 year treasury note was at less than 2%.

Then we were at 2% in 1949, 4% in 1960, 6% in 1970 and then we went to a peak 15.84% on September 21th, 1981.

That was specular high for long term interest rates in the US.

And then interest rates went down until December 18, 2008 when the 10-year touched 2.08% and the 30-year 2.53%.

And since then the trend, in my opinion, has changed and people will be surprised how high interest rates will go.

FROM: Dr. Marc Faber, 7 April 2011, by Eric King (King World News)

U.S. 10-year yields touch highest in a month, by Deborah Levine (MarketWatch)

Geoff-UK's picture

This posting on ZH is essentially a cut-and-paste job from four or five different articles.

Make your own fucking point and then stop talking.  This post makes Reggie Middleton look positively laconic.