Rock-bottom rates
set stage for gold

Editor's note: The following is a guest commentary from one of WND's sponsors, Kevin DeMeritt, president of Lear Financial. If you would like to learn more about investing in precious metals, take advantage of the free information Lear Financial is making available to WND readers.

American interest rates, at 1 percent, are now at their lowest level since 1958. This implies that the Fed is so concerned the American economy is quietly (and some say irrevocably) slipping into deflation, that it's engaging in even more rate-cuts.

They may be right, too. Deflation is nothing to take lightly. Of all the economic diseases, it can be the hardest to cure. With deflation, people defer their purchases because there's a strong likelihood the desired items will only be cheaper in a few months. With that mindset, it isn't hard to see how quickly a deflation can fuel itself. Japan is a prime example. The nation is seemingly unable to find its way out of the deflationary maze that's lasted nearly a decade now.

TRENDING: Voters blame Biden for border crisis, ready to punish Democrats, poll says

But inevitably – and reassuringly – nations do find the answer to the deflation riddle. In fact, over the past hundred years, the longest time we've remained at an interest rate bottom – our "Japan" – was just four years (from 1932 to 1936). When that bottoming finally does end, the rising tide of faith in the economy justifies higher interest rates. Why is that particularly significant? Because the last time that happened, stocks and gold took two very different courses through the ensuing duration of rising rates.

The high road and the low road

You can liken our present time to 1965. Back then, rates had been cut to 1.75 percent and, as it turned out, that was as low as they would go. From that point, rates began a 15-year advance that culminated in a jaw-dropping 15 percent in 1980.

So what did stocks do during this same time? From 1965 to 1982, stocks rose from 856 (DJIA) to a measly 857. That's just 1 point or a nano-profit of .001 percent. Stocks appeared stuck in neck-high mud while rates kept rising. Which shouldn't come as any big surprise. When rates rise, everything gets correspondingly more expensive as well, and it's harder for a business to eke out a profit.

Morgan Stanley confirmed this apparent correlation. Their recent study demonstrated that stocks, on the average, lost 13.8 percent within the first three months following the first interest-rate hike (after a period of rate cuts). Even after a year following this first interest-rate hike, stocks were still down 3 percent, according to the report.

But not all investments remain in the doldrums when rates head north. Take gold, for example.

An historic cue for gold

Gold is not dependent on any one economic stimulus. There are many economic conditions that actually stimulate the profitability of the precious metal (and its various forms). But at least one of these happens when a sea change takes place in interest rates.

Specifically, when rates start rising after a prolonged period of rate cuts, the demand dynamics for gold start kicking in. For example, when interest rates rose between 1965 and 1980, gold rose as well. From a low of $35 in 1965 (its fixed rate at the time), gold rose to a stunning $850 in 1980 (after Nixon terminated the gold-backed dollar in 1971, thereby ending gold's fixed rate). This gave long-term investors in the precious metal a wild 2,400 percent profit. Silver investors, too, enjoyed a terrific 1,500 percent gain.

Need another example? After the Great Crash of 1929, when stocks were in the basement and interest rates had bottomed and were poised to rise again, gold rose 75 percent – from $20 to $35 an ounce – proving itself to be the best game in town.

History repeats itself

Sooner or later, the day of rising rates will return. And when it does, there's a good chance stocks and gold will react in virtually the same way. Should we be looking at another multi-year rise of interest rates similar to the period from '65 to '80, it's possible that we'll also witness gold and stocks repeat their patterns from that period, too.

That should be enough historical precedent to encourage you to diversify your mostly paper portfolio with gold. After all, if we refuse to learn from history, particularly when it comes to investing our hard-earned money, the study of history truly becomes a trivial exercise.

Special for WND readers, Lear Financial is making available free information on investing in precious metals.

With more than 20 years of industry experience, Kevin DeMeritt is president of Lear Financial, one of today's fastest growing and most successful precious metals investment firms.