Could raising the interest rates bring an end to the gold bull market?

Posted By Scott Philips On Wednesday, December 21st, 2016 With 0 Comments

What bull market? This is a monthly chart of gold futures, gold is roughly where it was in 2011. Arguably the bear market is over, but that is speculative and subject to opinion (disclosure I’m currently long Silver).

Gold Chart

Nobody knows anything for certain in markets, so take all this with a very large grain of salt. And I’m the worst global macro trader I know, so I’m particularly retarded about getting this stuff right. I build objective trading systems and trade them, someone else can get into the predicting the future business.

Raising of rates in the US would negate carry trades and the global search for yield in a ZIRP world, and cause money to be repatriated back to the USA. In *theory* this should result in USD appreciation.

Conventional wisdom is dollar up – commodities down.

However…. raising rates could crash the bond market since traders are currently buying 30 year bonds with almost no yield after a 35 year bull market. Raising rates will probably kill the equity bull market. It could potentially instigate another 2008 style crisis if the music stops and everyone has to find a chair in a hurry. The longer we go on without raising the more certain this end becomes, if rates were raised in 2010 we would have had a recession and be well out of it by now. If they wait until 2018 to raise rates there is a real probability of global panic meltdown.

If we enter a real crisis phase, it is a strong possibility we see gold skyrocket. This is *not* a certainty, see 2008 when gold got clown raped like everything else.

Right now, gold is NOT is a bull market, it is arguably just coming out of a 5 year bear market, whether that develops into a bull market is not certain.

It should be noted that not raising rates because we are scared of markets going down a little bit is stupid. The problem doesn’t go away, we just painted over the cracks. Equity markets are so addicted to free money that a 5% drop sends them screaming to Momma Yellen for another shot of the quantitative easing.

That being said, there is an old saw in markets… “while the music is playing, you just gotta get up and dance”

The music is still playing, as of right now, today 3rd August. This all exists in a weird positive feedback loop where the longer rates are low, the less effect the low interest rates have. This is not dissimilar to the tolerance a junkie gets from heroin.

.25% interest rates just get me to normal these days.


Bottom line: If rates are raised, the effect depends on how long the Fed waits to raise them and a bunch of other not easily quantified factors. If rates are raised in an orderly fashion with appropriate skill, my best guess at a model macro portfolio would be… short bonds, long gold, stand aside from equities.

Share Button