Could Gold Drop Below $1,000? If There’s A Stock Market Crash – YES

Another week and gold has been falling again, but investors don’t know which way to turn given the yo-yo performance of the major stock indices – particularly in the U.S. and Asia. Gold has been damaged by yet another set of indicators which have suggested to some that the U.S. Fed will next week make its long heralded decision to start raising interest rates.  It has talked itself into the position that it will have to raise rates sooner or later or lose whatever credibility it may have, but there’s still so much uncertainty around that the decision could yet be postponed to later in the year, or even into next although this observer feels that sooner rather than later is the most likely outcome.  Indeed any decision to start raising rates will probably come as a relief to the gold investment community with the gold price having been knocked down almost every time the Fed is predicted to take the decision to start the process.

But should a Fed interest rate move be bad for gold.  The market is fixated on this and has been subjected to prediction after prediction from the major bank analysts suggesting that higher interest rates lead to reduced investment in gold as the latter doesn’t generate interest.  Yet if the Fed does raise interest rates it is only likely to be by around a paltry 0.25 of a percent for fear of a severe adverse impact on what has been recently a very fragile stock market.  The market is giving mixed signals at the moment.  Will it return to the bull market of last year – or perhaps crash horribly?  Indeed the recent market fluctuations – the Dow fell back over 200 points again yesterday after a big recovery the day before (and is down just short of 9% year to date) – must be exceedingly worrying for the Fed as well as to the investment community.  European markets are also falling back today after falls in Asian markets overnight.  This is all reminiscent of 2007-2009 when the major stock markets virtually halved in value in a few months.  The Fed will be running scared that an interest rates rise, even as small a one as would seem likely to be implemented,  could be the trigger to turn a stock market correction into a rout.

There have also been some dire warnings from the World Bank and the IMF that rising U.S. interest rates could have a huge adverse effect on emerging markets which are perhaps not in a strong enough position to counter the effects.  The global economy is a joined-up affair and changes in U.S. rates could have a huge knock-on effect around the world – and this unintended consequence has been adjudged as being strongly negative by the world’s top financial entities.

But a 0.25% increase in interest rates would still leave them in real negative territory and vis-a-vis gold should not provide the kind of adverse effect the markets seem to be reckoning on.  And it is untrue anyway to say that gold cannot thrive in a rising interest rates scenario – it has done so in the past and could well do so again if the general stock market is seen as particularly vulnerable.

But this is not say that gold could not fall back sharply in the short to medium term – but perhaps not because of rising interest rates per se, but because it could find itself in the position it found itself in back in 2008 when investors and institutions needed to sell good assets to maintain liquidity during the markets and commodities crash.  At the time, gold fell back from just over $1,000 an ounce in March to around $770 in December, before making a very rapid recovery and regaining all those losses within the following nine months before continuing on upwards to around $1900 in early September 2011. 

Could we see a repeat of this downwards and upwards performance?  Certainly if there is a similar stock market crash.  This would make the bank analysts correct in their gloomy forecasts for the gold price, but for totally the wrong reasons, but that won’t stop them claiming to have called the market correctly!

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Courtesy of http://lawrieongold.com/