- Historical Truth Unleashed –
By Lior Gantz, Contributor of the Future Money Trends Letter and Founder of Wealth Research Group
I have dedicated a considerable amount of time to understanding precious metals and their relationship to other factors and assets. Which is why I am buying gold and the mining shares here in December, just days before a rate hike by the Federal Reserve.
The narrative that investors are being fed right now is that gold doesn't produce yield, so rising interest rates would absolutely be problematic for the gold price, but that's conventional wisdom, and everything I have learned about financial markets tells me that following it will surely lead to terrible results.
There are two important factors to keep in mind:
Interest rates are rising, since the FED and the government see inflation starting to recede from historical lows, and with the proposed infrastructure plans, other construction metals have already begun trading higher. What's paramount to understand is that rates rise, but so does inflation, so real rates remain low, and are even negative.
In fact, Goldman Sachs turned bullish on commodities for the first time in years.
2. Tightening Periods vs. Gold
Contrary to what the mainstream media is feeding the average "investor," here's what has historically happened during first and second rate hikes.
Until today, there have been 3 clear periods of rising rates – this will be the 4th.
The first time occurred between February 1972 and September 1973, when the Fed Funds Rate increased from 3.29% to a high of 10.78%. During this cycle, the price of gold increased from $47 to a high of $123.25 – a full 162.23%.
As you can see, tightening periods aren't favorable for the S&P 500, as interest rates act as a weight on stock prices.
But, it was the second rate hike period that caught investors unprepared. Between January 1977 and April 1980, the Fed Funds Rate increased by a total of 1,300 basis points from 4.61% to a high of 17.61%. During this cycle, the price of gold increased from $129.75 to a high of $850, a gain of 555.11%. Gold gained 46-fold more than the S&P 500.
Speaking with fund managers last week, I can say that gold is under-weighted in their portfolios – even Canadian pension funds are less than 2% weighted in gold stocks. What's missing from gold analysis, is that gold has hit peak production, which could help drive this new bull market higher than any forecast out there.
The long-term picture is very bullish, and I am personally making big moves to position myself for a massive 2017-2019 move in precious metals and very specific mining shares.