Taken from another site.
"I was thinking of starting this thread for a while, but now that it seems quite certain that the Fed will hike fund rates in December, it seems most appropriate to do it now and discuss what effect it might have on other instruments on the markets."
I hope this will be a lively discussion and brings out all the different views and opinions of what effect the interest rate hike in the US has on commodities like the
POG, silver, copper, oil etc bonds and different stocks and indices.
Rather than blaring it all out however, I thought I hold back a little and see what develops, because the results may surprise.
But to get things started I will get us going with my opinion on the
POG (Price of Gold). For starters there is a popular believe that a rate hike will have a negative effect on
POG bearish, because gold itself does not give holders any interest and in tern holding costs may go up as well. So a hike will make interest bearing products more popular. I guess this is one of the reasons why we see the current drop in
POG, because holders are getting ready to shift elsewhere, like higher yielding
bond and money market funds.
However there is some doubt that this relationship actually exists and if there is such a correlation between
POG and interest rates it might be a positive one. Take the 1970s, when short term as reflected by 1 year treasury bills, interest rates bottomed at 3.5% in 1971 and by 1980 were rising to 16%. During the same period of time the
POGwent from $50 to $850/Oz. So during that time there seemed to be a strong positive correlation between
POG and interest rates!
During the most recent gold
bull market in the 2000s however, interest rates declined significantly and now while interest rates have been kept to near zero for a considerable time, following conventional market theory
POG should have continued to soar. Well, it didn't!
As in all commodity markets supply and demand ultimately regulate price with demand being the stronger component, because the level of supply only changes slowly. It takes about 10 years or so to for a mine deposit to go into production. Naturally speculation and the supply of paper gold does play a significant factor here!
The stock market usually suffers the largest outflow of funds, as rising interest rates make fixed income investments more attractive. Higher
bond rates make investors less likely to invest or hold stocks. So a rebalancing takes place.
With that rising interest rates could have a negative influence on mining of gold, especially on those mines, which are still in the investment phase, because the cost of investing goes up. Already producing gold miners should benefit as long as their debt burden isn't
killing them, because production cost also may go up as in capital cost for machinery and possibly petrol.
I guess in this little paragraph I spilt all the beans anyway, because everything is so connected. So I might as well add that during 1973 and 74 when
POG surged by more than 150% as interest rates were rising, the S&P 500 dropped by more than 40%, simply because
imo with falling stock markets gold is one the first alternatives to invest in!
I'm still interested in other opinions, so please me spilling the beans about what I think is going to happen, shouldn't stop anyone from being of different opinion and having different views on this or that or simply some aspect of what a rate hike could mean, but don't wait for my response, because I'm going to be away for well deserved break during the week and am not sure what internet access I'm going to have! But I will try to log in and see what is going on in the market and possibly read a bit here as well
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