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Gold predicts future worldwide interest rates a year or so earlier – will that theory hold water this time?
Many financial market gurus got surprised in the fact that worldwide interest rates took a jump up in the last week with EU deciding to raise rates and Bank of Japan also focused on removing the extra liquidity in the system.
The biggest question at this time is – how high can the long term and short term rates go. Most economists and financial gurus have miserably failed to predict the long term interest rates trends in the last one year.
The gold market predicts one year in advance what the long term rates will do one year later. This time things did not work that well for that model. Rates have gone nowhere in spite of gold going through the roof in the past twenty-four months. Then all on a sudden, the rates jumped last week!
The long term interest rates cannot be forecasted using existing economic models. The reasons are two. First, bond these days compete with dividend yielding US stocks. For US investors, the dividend is tax-free. That makes decent dividend yielding stocks look like municipal bonds. The second reason is well known – the central banks in Asia buy so much US treasuries to fund the US adverse balance of payments and trade deficits that the long term rate market seems to be artificially flushed with excess liquidity. That is also the reason for investors trying to get better yield through warehouse loans to the mortgage bankers.
New economics text books must be written to understand and analyze what has happened to the worldwide economies.
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