One need only look at the United States, and its gold reserves an order to understand what it is that keeps countries as diverse as China, and the U.K.; North Korea, and France; South Africa, and Australia; going. Gold when held properly by a country can become a catalyst for growth, not only for the country in question, but increasingly; in an ever connected world, the entire world as well. I bring this up because as the New Year is approaching, and the Federal Reserve begins to decide for a final time this year, on a rate increase, I wanted to take this moment to elucidate what I think might happen if the Fed does indeed raise rates, and what the consequences of that would be.
Should the Federal Reserve indeed decide to raise rates I believe that it would be a boon for almost the entire world. My logic in this assumption has a lot to do with Reserve currencies around the world, Debt repayment by the United States to its own debtors, and manufacturing increases as a result of the lifting of the long standing embargo.
The United States’ reserve currency is almost completely in gold. This means that the actions of America in areas such as debt repayment, and inflation tapering, can have a cumulative effect on the U.S. markets which in turn may affect markets overseas.
And indeed the U.S. has begun lowering the budget deficit (which can only be done by repaying creditors). This action alone floods the Chinese (who are the U.S.’s number one holder of debt) markets with a powerful injection of U.S. currency which currently is pegged to the Chinese Yuan which in it of itself has a cumulative effect for the value of the monies that the Chinese receive from the U.S. Manufacturing as I think we’ve all seen can be a powerful catalyst for growth in a society (read: the industrial revolution) such as the United States. And with the Chinese heavily invested in mining giants such as Rio Tinto, Mittral Steel, and BHP Billiton; this makes for an absolute boondoggle when the U.S. does indeed raise interest rates on for its gold reserve currency.
Since before the beginning of 2014 we have a seen a dramatic drop in the U.S. of the price of everything from milk, to gasoline, to food in general. And this year in particular the inflation index has actually decreased overall for the year ending December 31st. What this has meant is that the American consumer is able to buy more things which have been really helpful for the markets. And with the price of gasoline expected to dip below forty dollars sometime next year (according to me), this will make for even more buying opportunities in U.S. equities.
By this chain of events creating a virtuous cycle we are able to see the changes that an increase in the amount it cost to borrow money in the U.S. raise the value of gold on the commodities markets, and will in turn lead to higher returns for mining giants, which will then in turn fuel manufacturing throughout the world. This chain of events should be a welcome respite for U.S., and Asian markets which have been relatively weakened from a year of uncertainties. This new tact by the Federal Reserve should come as a welcome holiday gift indeed.