Interest Rates Rise: What now?December 17, 2015 12:13 pm
Interest Rates Rise to 0.5% – So What Now?
US interest rates have finally been raised to 0.5%. Unsurprisingly, the world hasn’t ceased and the markets are so far so good. When reality hits, as is always the case: you prepare for something that is going to happen always fearing the worst but the worst never actually comes. A bit like climbing with a harness, you never actually fall off the wall but you are thankful it is there all the same. The markets seemingly have followed this rule. So far the gold price has not fallen as commentators had suspected. In Sterling (GBP) and Euros (EUR) the gold price has done the opposite, as currency depreciation against the dollar has buoyed the price in other currencies. Likewise in Dollars, the price of gold has barely moved.
GBP Gold Price
EUR Gold Price
Sterling in 3 months has fallen 1.57 GBP/USD to currently 1.4974. Likewise the Euro has fallen from 1.15 EUR/USD to 1.09 EUR/USD. These currency movements have a definitive impact on the gold price depending on your local denomination.
Yesterday, I was explaining to a client what could happen in 2016 in relation to the gold price in the UK. It is more than likely that the dollar will continue its dominance well into 2016, especially if as time goes by the interest rates rise doesn’t sink the ship. Then it is likely we will see another 0.25 basis move to 0.75% and even an unthinkable 1% before long. If that is the case, the pressure on the gold price in dollars is likely to move hesitantly lower but given the currency battles, even a drop to say $1,040 per oz, the GBP/USD currency price will also shift in the dollar’s favour.
For example a drop of $25 in the gold price to $1,040 combined with a currency movement to 1.47 will mean that gold in sterling, will still be over the £700 confidence line at £707, only 6 pounds lower than it is now. Not exactly eye-watering.
Verdict: – So far the interest rates rise hasn’t sunk us all. No doubt in the coming weeks and months much will be made of any negative financial news that is published. Truthfully, an increase in the interest rates is a good thing. Economies around the world are recovering and we should all return to our light-headed exuberance of pre-recession. That’s of course if you haven ‘t lost faith in the banking system and you accept the ignorant bliss of wilful memory loss, to forget the economic mess we were recently in. My memory however is sharper than ever.
Article by Michael Cooper