Why A Rising Gold Price Is Bad News

We have written about our concern that high annual deficits and accumulating public debt will lead to higher mortgage rates and to higher interest rates in general, burdening future generations with the interest cost and jeopardizing the country’s credit rating, continuing to burden economic growth, and adversely impacting employment.

The Fed has temporarily countered the interest rate risk by artificially keeping interest rates low by inflatiing the money supply, thus discouraging savings and investment, causing long-term misallocation of resources, and leading to higher commodity prices and living expenses down the road. This note explains why a rising gold price is bad news.

But many businesses are not interested in borrowing to finance expansion, given the difficult economic situation. They are concerned that consumers are paying down debt rather than spending, are burdened by ever more regulation, and are unsettled by temporarily extended and unknown future tax rates on income, capital gains, dividends and estates.

Add in the higher costs of employment benefits — particularly health care insurance costs — and you have an economic environment in which established businesses have no incentive to expand and entrepreneurs are not keen to take the risk of starting new businesses.

Trouble Ahead

Unfortunately, a rising gold price signifies trouble ahead. It’s a kind of canary in a coal mine. As more individuals become concerned that their dollars will buy less in the future and exchange them for hard assets, commodity prices such as food and fuel and metals and building materials will continue to rise. Foreign central banks that hold large quantities of depreciating dollar-denominated debt will demand higher interest rates to compensate for their loss in value or will swap out of dollars to buy gold, and the gold price will continue under upward pressure, while the value of the dollar declines.

Investors Can Hedge Against The Risk Of Hyperinflation

As an individual you can protect yourself to a large extent against the erosion of your purchasing power and economic disaster by adding gold and silver to your investment portfolio. Owning gold can provide security and opportunities not available with other investments.

But few American investors are familiar with gold. Its high value, its need to be stored somewhere secure, and the fact that it is available in sundry forms by a broad spectrum of sellers including bullion dealers, commodity brokers, stockbrokers, coin dealers and mutual fund managers lead to exaggerated claims, myths and general confusion.

Fed’s Straitjacket

The only way out of the problem is to expand the economy, to get businesses to hire and put Americans back to work. People with stable jobs pay taxes, pay their mortgages and buy goods and services. The Fed has limited tools to accomplish this: injecting money into the economy and lowering interest rates, both of which they have done with little benefit. As noted, businesses are reluctant to hire and expand regardless of the availability of short-term credit.

The main reason that businesses will not expand and hire: Administration policies that result in more expansive government, entitlements and regulation, which mean both higher cost of doing business and higher government debt. Which brings us back to the depreciating dollar, the reluctance of foreign holders to hold more US government debt, higher bond interest rates (when they are allowed to rise), and higher gold prices.