Gold will rebound when borrowing costs rise

After a strong start at the beginning of the year, gold, flirting at $1,200 a troy ounce, is at a nine-month low.

The rampant inflation many investors feared would result from several years of record-low interest rates and central bank multi-trillion-dollar money-pumping schemes has not materialized.

In fact, deflationary concerns have spurred European and Japanese central banks to drive down interest rates further and inject yet more liquidity into their sagging markets. And last year’s gold-buying spree that swept China, the world’s largest gold consumer, has turned sluggish as the nation’s economy has softened. And now, with the Federal Reserve soon to end its quantitative-easing experiment and with interest rates expected to rise, a stronger dollar is putting yet more downward pressure on gold prices.

Interest rates in the United States have not risen since 2006. When borrowing costs rise, the economy will slow down, equity markets will decline and the fragile real estate recovery will falter.

We forecast gold prices will not rise until after the interest rates shock hits and governments/central banks initiate new cheap money-injection measures in attempts to forestall panic on the Street.

In addition, while we do not provide financial advice, as trend forecasters, we remain bullish on gold as a safe-haven asset in times of geopolitical turmoil.