During the last week, gold has suffered a drop, falling as low as $1,293 in a few days. Janet Yellen recently suggested that the Fed could raise interest rates, as evidenced by Reuters (among many others): “Higher interest rates would encourage investors to switch to assets that, unlike gold, pay interest.” The airplane crash in Ukraine took gold higher from its low, but remains under $1,320 as of July 18.
Rick Rule, Chairman of Sprott US Holdings Inc., comments on the gold price action by saying gold could fall back another 10% as a normal event in this market. What is Rick Rule’s outlook for gold in 2014?
Does the recent drop in the gold price affect your outlook for gold in 2014?
Rick Rule: No, not at all. In a recent interview, I suggested that gold and gold equities would grind higher after reaching a bottom in July of last year. That is precisely what’s happening. We’re seeing higher highs and higher lows, but every new high requires a subsequent consolidation. You’ll be up 10 or 12%, then off 8 or 9%. The ‘backing and filling’ that we are seeing right now is completely consistent with the behavior that we would expect to see coming out of a bear market bottom into a gradual recovery.
I think this market is in good shape. It’s healthy. These ‘j-curve’ advances are followed by appropriate declines on the backside. I am very encouraged by the market action that we are seeing in both gold, and the gold equities.
What to make of Fed Chairman Janet Yellen’s recent comments regarding raising interest rates? Are higher interest rates plausible?
Rick Rule: What Janet Yellen said was that the recovery was tepid at best – if we have a recovery at all. The political narrative dictates that low interest rates are needed in order to help the economy.
My own belief is that interest rates will remain low in the next 18 months or 2 years, but for a different set of reasons. There isn’t much private demand for loans, even at this low interest rate. But there is an implicit transfer of wealth from savers, who benefit from higher interest rates, to spenders. It’s the spenders who are more numerous, which means that the government will look out for the spenders at the expense of the savers.
Secondly, the extraordinary levels of Federal, State, and local debts would be difficult to service at higher interest rates. As a result, I think that the Fed will continue to do whatever it can in order to keep interest rates constrained for as long as possible. As long as the demand for debt from the private sector remains low, I believe you will see artificially low interest rates.What do continued low interest rates mean for gold going forward?
Rick Rule: Ultimately, it’s probably pretty good for gold. Right now, you are seeing gold being crowded out, because the returns from other assets such as stocks look more attractive.
But the way I look at this nearly ‘free’ capital is ultimately good for gold. It weakens the medium of exchange, the US dollar, in which gold is denominated.
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