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izzy

Interest Rates And Gold

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If there is a forthcoming failure in the bond market and interest rates rise, will there be a flight from gold into high interest gilts and savings thus causing the gold price to fall?

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Izzy,

As you ask about bonds and gilts, I am presuming you are referring to corporate bonds and government gilts.

If, as you suggest, interest rates rise, then it would be because base rate had been upped by the government to dampen inflation.

This would mean that gilts, which are mainly a fixed rate, would be unattractive due to the rate of interest they would attract as inflation and interest rates increased.

When was the last time you saw gilts or bonds with an index linked rate of return?

I believe that if bonds become unattractive, then so will gilts.

High interest rates will only work if what you get back covers the risk of you investing in such instruments, and keeps pace with whatever level of inflation exists at the time.

Gold would do very nicely thank you in such circumstances.

This is from Niall Ferguson's, "The Ascent of Money".

If you didn't see the series, well worth putting in your favourites to watch.

http://www.channel4.com/programmes/the-asc...ney/4od#2918407

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I think it more likely that there will be a currency crisis than a bond market failure in the near future.

The states is the place to consider most. When the stockmarket dives funds of mutual or hedge funds and money markets move into treasuries ,this will be the time when the bond markets perk up a bit that

the Chinese will take the jump.This will also be the time that the carry trade in the Yen will fold.

Gold will increase in value rapidly during a currency/bond crisis. It will rocket if the chinese take the opportunity to dump dollars.

I think at this stage, we in sterling are irrelevant when it comes to the price of gold. We should hold gold as protection against a guilt strike/sterling crash. Either gold or foreign currencies but which ones?

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Izzy,

As you ask about bonds and gilts, I am presuming you are referring to corporate bonds and government gilts.

If, as you suggest, interest rates rise, then it would be because base rate had been upped by the government to dampen inflation.

This would mean that gilts, which are mainly a fixed rate, would be unattractive due to the rate of interest they would attract as inflation and interest rates increased.

When was the last time you saw gilts or bonds with an index linked rate of return?

I believe that if bonds become unattractive, then so will gilts.

High interest rates will only work if what you get back covers the risk of you investing in such instruments, and keeps pace with whatever level of inflation exists at the time.

Gold would do very nicely thank you in such circumstances.

This is from Niall Ferguson's, "The Ascent of Money".

If you didn't see the series, well worth putting in your favourites to watch.

http://www.channel4.com/programmes/the-asc...ney/4od#2918407

Index linked gilts are available and are useful in times of high inflation but don't protect you from a sterling collapse.

The opportunity cost of owning gold increases when interest rates are high since gold does not pay interest. If there is a collapse in confidence in the dollar (or more likely sterling) investors would demand a higher interest rate to purchase gilts or treasuries but a collapse in confidence in the currency would benefit you if you hold gold. Just think of the Iceland situation where the currency value has collapsed and interest rates have gone up to protect the currency. Anyone holding gold would have preserved their wealth.

Interest rates would also go up if the economy recovers (to prevent inflation) and an economic recovery would be bad for gold as there would be less fear and more opportunity to make money elsewhere.

Personally I think it is almost too difficult to plan for and best not to put all your eggs in one basket. If you could logically work it out everyone would have done it already and priced it into the price of gold.

I'd be interested in what others make of my thoughts

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dollar dives and gold spikes, $20 so far - not much but lets watch if a trend develops here.

USGovt Yuan Bond Threat

by Jim Willie, CB. Editor, Hat Trick Letter | July 29, 2009

The tables are fast turning against the deeply indebted USGovt officials. USA Inc is in deep trouble. Its productive engines in both finance and industry are either wrecked or sputtering, even as its debt burden grows exponentially. Debt default litters the landscape. Next its sovereign bonds will be have to be sold to some extent outside the US$ Sphere, which will put at great risk its stock, namely the USDollar itself. Let’s call them USGovt Dragon Bonds. The custodians desperately seek creditors to supply much needed capital in order to fund the gigantic and growing USGovt debts, which by the way are grossly understated. The last resort is to monetize the USTreasury Bond issuance, a process well along. With the aid of the USDollar Swap Facility, the USFed has been able to secretly bid on USTBonds from foreign soil, have it appear like foreign bids, and conceal the continued and broadening monetization initiative. The United States is boldly defying the creditor nations, printing money, and buying its own debt. When more fully revealed, the USDollar will suffer the consequences. A sense of betrayal will surely come, much like discovery that the CIA has been flooding the globe with counterfeit $100 bills, or Wall Street has been flooding the globe with counterfeit Fannie Mae Bonds. Closer to home, it is akin to selling lemonade has been secretly watered down, or putting lawn mower clippings into the reefer batch before sale.

http://www.financialsense.com/fsu/editoria.../2009/0729.html

Denninger - Unemployment Report FAR Weaker Than Claimed

http://market-ticker.denninger.net/archive...an-Claimed.html

I should lay my cards out here, I am not trying to support a position or present an argument just reacting to the markets. Personally, I am expecting a low in august, a rally in sept taking out 1000 with a higher low in november but may have to change my plans if things change.

Edited by richyc

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Index linked gilts are available and are useful in times of high inflation but don't protect you from a sterling collapse.

The opportunity cost of owning gold increases when interest rates are high since gold does not pay interest. If there is a collapse in confidence in the dollar (or more likely sterling) investors would demand a higher interest rate to purchase gilts or treasuries but a collapse in confidence in the currency would benefit you if you hold gold. Just think of the Iceland situation where the currency value has collapsed and interest rates have gone up to protect the currency. Anyone holding gold would have preserved their wealth.

Interest rates would also go up if the economy recovers (to prevent inflation) and an economic recovery would be bad for gold as there would be less fear and more opportunity to make money elsewhere.

when interest rates rise people hold gold as an inflationary hedge. Fear may have subsided but gold becomes attractive for another reason.

There will be opportunities to make more money elsewhere but for many gold is not an investment or for making money it is an insurance policy.

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If there is a forthcoming failure in the bond market and interest rates rise, will there be a flight from gold into high interest gilts and savings thus causing the gold price to fall?

been thinking about this again and believe that a bond market failure (USA) will result in a currency crash and gold will rocket both in dollar and sterling terms. If there is a gilt strike, then there would be a sterling crash and gold would soar in sterling terms. Interest rates seem irrelevant in the event of a bond market crash/gilt strike imho.

Bond/gilt issues reflect on the currency and in that case I believe that gold can be considered a currency that will react as others do.

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Izzy,

I'm glad you posted your question. We are in a situation when all the old rules don't seem to apply.

Making sense of what's happening can be compared to police always being one step behind whatever new trick the crook comes up with.

Clarifying the 'flations and interest rate question has vexed me for a while now.

It didn't make us 100% sure that our investment in gold was a good call.

I'm not saying that it was 0%, it was and remains nearer 100%

The observations of Richy and Dr.Ray get me closer to why it is a good investment.

Their emphasis that it is more than likely currency collapse that will tip things over the edge is, I believe, spot on.

'Flations are a major problem, all countries have been there and survived. Usually with a massive social cost.

Currency collapse is not inevitable, but who in the present situation can totally dismiss it.

One things for sure, it is a volatile mix out there.

Once again thanks for starting this thread. Looking at the world from a new angle is always to be welcomed. I hope it receives more comments.

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I think it more likely that there will be a currency crisis than a bond market failure in the near future.

The states is the place to consider most. When the stockmarket dives funds of mutual or hedge funds and money markets move into treasuries ,this will be the time when the bond markets perk up a bit that

the Chinese will take the jump.This will also be the time that the carry trade in the Yen will fold.

Gold will increase in value rapidly during a currency/bond crisis. It will rocket if the chinese take the opportunity to dump dollars.

I think at this stage, we in sterling are irrelevant when it comes to the price of gold. We should hold gold as protection against a guilt strike/sterling crash. Either gold or foreign currencies but which ones?

I would suggest gold anyway. The risk of a financial disaster is very high, and hyperinflation causes an irreversible destruction of your cash savings. It is my belief that gold and silver are required, not advisable, for insurance. I am also pretty sure of making something on the price moves as well.

I also hold a small position in Euros in cash, but I think it would be better held in Yuan. Forget the rouble - see Sterligoff's website; he has already written off his own currency in favour of gold settlement for commodities.

http://www.sterligoff.com/

At the risk of Cato coming to punish me for disclosing Chinese State secrets, I reckon the Chinese are FAR too good at business not to be already dumping dollars for hard assets, gold amongst them. I think there are some very secret stockpiles of copper, uranium, platinum and gold. Maybe oil, grain and other commodities for short-term as well.

If they aren't doing this already, they jolly well should be.

Edited by Old Nis

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