The Gold Report: Despite the lack of an economic recovery and the reality of ever-increasing debt, the U.S. dollar and the equity markets remain strong, while gold (as denominated in U.S. funds) remains weak. Do you expect these conditions to change?
Adrian Day: Yes, absolutely. The strong dollar and equity markets are two of the main reasons why gold has been down over the last 18 months. The third reason is anticipated higher interest rates.
Gold will recover because the U.S. dollar is overvalued against most other currencies, by as much as 25–30% against most Asian currencies. We’re not expecting an equities crash any time soon, but the risk level in the market has increased, and stocks are no longer fundamentally cheap. So investors will increasingly look to the protection gold affords. As for higher interest rates, the U.S. Federal Reserve has, by its actions if not its words, made clear it is waiting for perfect conditions before raising rates. I’m not quite sure when we’re going to see such conditions. In any event, higher rates are already factored into the gold price, and should the Fed approve a quarter-point rise, I would actually expect gold to rise on that news.
TGR: Many people argue that continuing zero-interest rates are the only reason the economy is doing as well as it is. Do you agree?
AD: No question. This has been one of the weakest-ever economic recoveries out of a recession. My greatest concern is the lack of tools remaining to the Fed should the U.S. economy enter even a modest recession.
Interest rates are too low. A strong economy requires capital investment, which comes from savings. Creating wealth by printing money builds a facade. It depreciates the value of …read more