US Fed Hikes Rates: Gold Yield Parity and Oil Shocks Shake Markets

Tim Elliott (0:00)

This is the Morning Drive, it's time to talk gold and precious metals now. US interest rates have been raised for the first time in more than three years. So what does this mean for the price of gold, silver, other precious metals, commodities?

Jeff Rhodes is Managing Director of Business Development for the Middle East and Asia at Managing Metals back in the studio. Good to see you.

Jeff Rhodes (0:21)

Good morning.

Tim Elliott (0:23)

So this is the news of the week, isn't it? This is kind of the news that we've all been semi expecting, fearing, depending on which side of the fence you are, of course, interest rates up 25 basis points, quarter of a percent.

Jeff Rhodes (0:34)

Yeah, it seems as though we've been talking about this, whether it's September, nine months, we've probably been talking about this for nine months.

Tim Elliott (0:45)

We often spend, I wonder if we spend more time talking about what our interest rates are going to be next week, where are they going to go? Talking about gold, which is ostensibly, well, actually, what you're supposed to be talking about.

Jeff Rhodes (0:56)

I think the key factor when you're thinking about gold is this view that gold has a zero interest rate, gives you a zero yield. But of course, as we all now know, because of Monetary Metals, that is not true. At the moment, if you put gold on deposit for at least one year, you get 4%.

Tim Elliott (1:20)

Yeah.

Jeff Rhodes (1:21)

It's amazing. Okay, so now we've got dollar interest rates at 4%. Same as the gold interest rate. So it's quite interesting. Quite interesting.

You didn't react to him.

Tim Elliott (1:39)

Sometimes you have to let them go.

Jeff Rhodes (1:40)

No, absolutely. But it was, we finally got over the line. So 3.75 is now 4%.

But it really is come and gone. And it's so, it's, what does it mean? It actually doesn't mean too much because the gold price is currently around 4,350.

Yeah. The low this week has been 4,236, with a high of 4,400. Now, if you look at the expectations for this week, which we'd sent out on Monday, we called the low as 4,250, 50 close, you know, 20 cents away.

Tim Elliott (2:29)

That's exactly what you said last Friday, Jeff.

Jeff Rhodes (2:31)

Of 4,400, well, 4,500, 4,450, just $50, 50 cents away from, you know, being spawned. So, yeah, I think now that's out of the way. We've got the interest rate hike. There will be discussions about the next rate hike to come.

I didn't think you'd see this one, actually, but I don't think you'll see another one this year. I really don't. It's quite interesting looking at the UK. UK did not follow suit. The UK's leftist, interest rates unchanged because as far as the government there is concerned, it doesn't warrant a change in interest rates. But that's what you were saying. Interest rates cannot impact oil prices.

Tim Elliott (3:27)

That's right. That's what you were saying about the US. Yeah.

Jeff Rhodes (3:30)

So actually, it's up 25 basis points. But it will not affect inflation because it's not going to... Well, certainly, it will affect inflation in some way. It will increase inflation because your mortgage rates will go up, which is an interesting point. Will the banks follow the Fed?

I'm not so sure they will.

I think you'll find that the banks can see this as being short-term, and it's short-term because of one reason and one reason alone, that is what's going on in the Gulf and the impact on oil supplies. And concern about oil supplies, that could go away tomorrow. And if that went away tomorrow, and suddenly you saw oil prices sharply lower, and I would have said over the next month, you're going to wake up one day, and oil prices will not be 105 or 110, they'll be 80 or 85 or 75, then the inflation problem has gone away.

Tim Elliott (4:45)

Well, oil prices are down, they are below $100 a barrel now, aren't they? I was checking yesterday, it was 90...

Jeff Rhodes (4:52)

I think you're looking at WCI.

Tim Elliott (4:54)

I checked yesterday afternoon. No, no, no, I was looking at Brent yesterday.

99.3, I mean, slightly under, but it's still that barrier, isn't it? Yes, it is.

Jeff Rhodes (5:03)

And I do think that the rationale for raising rates, I don't think Kevin Walsh had any choice. You know, everyone's been, you know, what was the reading last week? 85% expected this. So we've now got it.

But you don't have rampant inflation because of more demand chasing fewer supply. Not at all. It's simply the cost of energy. And there is a willingness, from all concerned, to see lower oil prices. Lower oil prices will mean higher gold prices because the pressure on interest rates will reverse.