From the Desk of Craig Griffin, President and Founder of ITM Trading
September 12, 2014
The dollar has been surging as of late. Could the strong dollar be signaling a rise in interest rates? I don’t believe so. I think the economy is much too weak for interest rates to rise for any meaningful period of time. Yes, interest rates may move upwards for a short period, but rising rates and a strong dollar place pressure on U.S. exports and it also compounds the interest on the debt at a much faster pace, a debt that has already exceeded $17 trillion.
For example, if you want to know how long it will take to double your money at 2% interest, divide 2 into 72 and you get 36 years. Now the National Debt is rising dramatically every month, actually every day, but it isn’t compounding that quickly as we can see from the mathematical example above. The debt is currently rising rapidly because of new debt that is being added each year. But what happens if interest rates rise to just five percent? Divide 5 into 72 and the debt doubles every 14.4 years. What if interest rates rise to 10 percent (Fed funds rate reached 9.75 percent) like they did in the late 80’s? Divide 10 into 72 and the national debt will double every 7.2 years. That is without adding any additional debt to the principle!
This is the pickle the Fed is in. Raise rates and the National Debt compounds faster and faster, leave rates artificially low and inflation begins to take hold. Some analysts believe that rising inflation is and will be desirable because at some point this debt has to be paid back either by default or through a cheaper dollar/inflation.
And, underlying inflation pressures are rising as reported and demonstrated by Economic Cycle Research Institutes (ECRI) U.S. Future Inflation Gauge (U.S.FIG). The U.S. FIG is hovering right around a six year high and has clearly risen since last fall according to ECRI’s Chief Operations Officer Lakshman Achuthan.
I believe this is why gold has found a bottom around the $1200 level. Richard Russell, Author of the Dow Theory Letters, said in his September 11, 2014, Daily Remarks Section, “With the expense of a semi-war against ISIS, a higher gold price would be expected. With gold priced around $1250, my thinking is that gold is close to completing a major bottom and is ready to resume its bull market next year.”
I am not sure when the gold price will rise significantly but I feel very confident in saying that gold will rise to much higher levels in the future. In an interview I conducted earlier this year with James Rickards, he said that he felt gold would rise to anywhere from $3000 an ounce to $10,000 an ounce.
If hyper-inflation was to set in as it did in Germany in the early 1900’s you can throw Jim’s figures out the window. In January 1919, it took 35 German Marks to buy one ounce of gold, but by November 1923, 87 trillion Marks were needed to purchase the same ounce of gold! How long will it take to resolve the debt situation here in the U.S.? I’m not sure anyone really knows!
So remember, “It would be foolish to acquire gold for the short term but it would also be unwise not to own some gold for the long term!”
Craig P. Griffin