The Gold Report: Common wisdom says that when the U.S. Federal Reserve raises interest rates later this year, it will prove negative for gold. Do you agree?
Jeb Handwerger: I think it’ll be the opposite. Money printing and easy credit has fueled the stock market rally and beaten down commodities. Investors flocked to dividend-paying stocks, and became speculative in tech, which has led to huge overvaluations similar to the late 1990s dot-com debacle. We’ve had a four-year parabolic rise in the Dow without a meaningful correction. Most investors who have been in this business for a while know that every four years you get a bear market with about a 30–50% correction. Rising interest rates may be the catalyst that causes investors to flee the general stock market, which has proven attractive in a low rate environment. Higher interest rates concurrent with a pickup in inflation could result in a rush to a safe haven in commodities and wealth from the earth—natural resources and precious metals, which is historically a hedge against a pickup in inflation.
The Dow-gold ratio is a critical tool to see the inverse relationship between stocks and gold. When stocks move higher investors abandon gold and vice versa. Notice the pattern since 1913 when the Federal Reserve was created. The stock booms and busts are much more dramatic. In the 20th century we saw the Dow-gold ratio move close to parity during the Great Depression and in 1980 when interest rates soared to record territory.
Notice in the 1970s there was a much more severe decline than in the 1930s as money printing and debt soared after gold was completely abandoned during the Nixon Administration. Eventually this will revert back to 1:1 or possibly lower sometime in the next 10–20 years. Investors must be prepared for such …read more