Gold update: Fed pauses and silver rises

This week the Fed decided not to raise interest rates. Inflation is falling and the series of interest rate increases still have to be incorporated into the economy, as an interest rate increase only becomes “visible” in the economy after 12 to 24 months.

The increase in oil prices is a cause for concern because it will lead to higher prices in the long term. Jerome Powell’s comment was clear. He expects that interest rates will have to remain high for longer to structurally tackle inflation. A similar message came from several comments from ECB members this week.

Central bankers are not yet convinced whether they will achieve the 2% inflation target. The economy is doing relatively well, but the 10-year interest rate in the US is now around 4.4%. The 30-year mortgage rate is now almost 8% and the interest on credit card debt is above 23%. Government debts are too high worldwide and higher interest rates are actually unsustainable.

America’s debt position is worrying. The national debt reached $33 trillion this week. The debt ratio (debt versus GDP) is 123%. About 40% of this debt must be refinanced in the short term. With an interest rate that was previously below 2% and now above 4%, this can become a serious problem.

We also see rising interest rates in Europe. In Italy, the country with the highest percentage of national debt of more than €2,500 billion, interest rates are now at 4.5%. The debt ratio is now above 140%. The ECB is currently selling German and Dutch government bonds and using the proceeds to buy Italian government bonds to shore up the country’s debt.

The Netherlands has a percentage debt ratio of less than 50%. This means we comfortably comply with the rules of the monetary union. But Spain (113%), Portugal (114%) and France (111%) are also well above 100% and will probably never fall below the European Commission’s requirement of 60%.

And that is an important reason why confidence in the euro is declining. We are in a currency union with countries that have very different financial disciplines. The southern countries of Europe cannot be compared to the northern countries in that respect. That is a problem that will escalate sooner or later.

Silver is catching up

Last week, gold managed to gain despite the ECB implementing a 25 basis point interest rate increase. Silver lagged behind but was able to recover this week. The silver price rose 2.4%. Silver closed at €709 per kg. This means that an investment in silver is still trading at a small loss of 1.2% this year.

Gold rose a little further and posted a weekly gain of 0.4%. This year, an investment in physical gold has increased by 6.1%. The gold-silver ratio currently stands at 1/81 versus 1/83 last week. The ratio still points to an undervaluation of silver.

No one knows what prices will do in the coming weeks and months. Both precious metals have risen by an average of about 9% per year since the year 2000. A frequently chosen strategy is to buy precious metals based on the Dollar Cost Average (DCA). DCA comes down to periodic purchasing for a fixed amount. This spreads the price risk.

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