Is Aussie Dollar Gold Heading to $5,000?

This’ll make you laugh. From Bloomberg:

Federal Reserve Chair Janet Yellen seems to be coming around to what her one-time rival, Lawrence Summers, has been arguing for a while: Some of the forces holding down interest rates may be long-lasting and secular.


According to the report, Yellen’s exact quote was that interest rates remain low due to ‘factors that are not going to be rapidly disappearing, but will be part of the new normal.

Again: Hah!

Those factors Dr Yellen, you know what they are, don’t you? That’s right…they’re the central banks…including the US Federal Reserve.

Dr Yellen’s comments betray either an extraordinary lack of awareness, a high level of ignorance…or complete bold-faced denial.

It’s like when your annoying friend grabs hold of your hand, slaps you across the face with it, and then tells you to stop hitting yourself!

But that’s the academic central banker for you.

Newsletter writer, James Grant, talks about this period of monetary policy as a ‘PhD Standard’. It’s not a ‘gold standard’ or a ‘US dollar standard’. Instead, the money system is under the complete control of PhD-wielding academics.

And in our view, these people are having a bigger, more negative, and more dangerous impact on the world than a gun-toting terrorist in a nightclub.

Goodbye to the rate rise

How things change. Check out the chart below. Market watchers call these the Fed’s ‘Dots’ charts.

The charts aren’t meant to imply a Federal Reserve member’s voting intentions for the future. They simply reflect their view of where they think the Fed Funds Rate will be at the end of each calendar year.

The first chart is from the previous Fed meeting, showing at that time where they thought the rate would be in the future:


Source: Bloomberg
[Click to enlarge]

For the end of 2017, the median forecast for the Fed Funds Rate was 1.875%. The median for the end of 2018 was 3%.

That was following the Fed’s March meeting. So, has anything changed since then? Yes. Yes it has.

Here’s the latest chart, based on new forecasts from Fed members:

Fed members

Source: Bloomberg
[Click to enlarge]

It may be difficult to see the difference, so I’ll tell you. Now, the median view of Fed members is that the Fed Funds Rate will be 1.625% at the end of 2017, and 2.375% at the end of 2018.

That, my friend, is a big difference.

Remember that economic recovery? You know, the one that’s a result of the Fed’s gajillion-dollar money printing spree? Turns out things may not be going quite to plan.

The recent rubbish jobs numbers from the US put paid to the idea that the Fed would raise interest rates anytime soon.

The Financial Times confirms as much:

Slower jobs growth and overseas hazards such as a possible UK exit from the European Union prompted the Federal Reserve to keep rates unchanged on Wednesday and trim back its longer-term interest-rate forecasts, in a sign of greater caution at the central bank.

Your editor will admit that we’ve flip-flopped more times than we care to mention on whether the Fed will raise rates or not.

We were convinced they wouldn’t. Then we saw a rate rise as the perfect chance for the Fed to instigate a stock market crash…which would give them the cover they needed to print more money.

Now we’re back to our original position. We just don’t see how the Fed can possibly raise rates. Not that we want rates to stay this low. Simply because we know the world’s economy isn’t as strong as most central banks think.

And the longer rates stay low, the more that it can only mean one thing: good news for gold.

Gold a bad investment? Not likely…

The fact that the Fed believes rates will stay lower for longer is great news for gold.

You can see that in the gold price action on the chart below:

gold price

Source: Bloomberg
[Click to enlarge]

In US dollar terms, gold is now trading at the highest price since mid-2014. After trying for a few weeks, it has now busted back above the US$1,300 level.

From here, we can only see good news ahead for gold — providing we’re right about interest rates (and providing we don’t flip-flop again).

One of the key anti-gold arguments that many folks make is that gold is just a lump of metal. Importantly, unlike money in the bank, gold doesn’t earn interest.

Well, isn’t that funny? Because for a long time now, US dollars in the bank haven’t earned interest either. In which case, it’s much harder to make the argument that holding gold is a bad idea.

We’ll argue that, in a low interest rate and negative interest rate environment, gold is a great asset to own. And based on the evidence we’ve found, the data backs it up.

Take this chart. It’s the gold price in Japanese yen:

Japanese yen

Source: Bloomberg
[Click to enlarge]

Japan cut its interest rate to zero in the late 1990s. What do you know? Since then, the gold price in yen has risen 374%.

Check out the chart below. It’s the gold price in Swiss francs:

swiss francs

Source: Bloomberg
[Click to enlarge]

The Swiss National Bank cut its interest rate to near zero in 2009. It now has a negative interest rate. But since 2009, the gold price has risen over 26%.

Sure, it’s not quite to the scale of the rise denominated in yen, but heck, compared to Japan, the Swiss are only just getting started.

The US cut its interest rate to zero late in 2008. Since then, even though the US dollar gold price is down from the peak, it’s still up over 81% from late 2008:

US Dollar gold price

Source: Bloomberg
[Click to enlarge]

Finally, the gold price in Aussie dollars. Local commentators and analysts (bizarrely) continue to suggest that gold is a terrible investment for Aussies.

We don’t know why. To our mind, this chart looks pretty good for Aussies. It goes back to 2002:

gold price in aussie dollars

Source: Bloomberg
[Click to enlarge]

Since then, the gold price in Aussie dollars is up 225%. We haven’t annotated a gain on this chart, because Aussie interest rates are still well above zero, at 1.75%.

After such a strong run, on comparatively high interest rates, we can only imagine what a dose of even lower, and perhaps negative interest rates, will do for the Aussie dollar gold price.

How does $5,000 or more take your fancy? That would be nice.


Kris Sayce,
For Markets and Money

Editor’s Note: This article was originally published in Port Phillip Insider.

Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Markets and Money e-newsletter in 2005. He is the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service, Markets & Money.

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