Gold News

Rising Rates "Positive for Gold"

Higher rates will signal rising inflation, with the Eurozone moving to print money...
EDWARD KARR is founder of RAMPartners S.A., an investment management and investment banking firm based in Geneva.
Here he tells The Gold Report why European bankers are destined to inflate their way out of structural crisis and why that is good news for the price of gold. Karr believes gold has bottomed and should explode upward.
The Gold Report: Let's talk about the Foreign Account Tax Compliance Act (FATCA) of 2010. What is the FATCA regulation?
Edward Karr: In March 2010, Congress passed the Hiring Incentives to Restore Employment Act. The HIRE Act was intended to stimulate domestic jobs in the US FATCA was quietly slipped in as a very small part of the HIRE Act. In a nutshell, FATCA makes every overseas bank, financial company, hedge fund, mutual fund, broker, and dealer an enforcement agent of the US Internal Revenue Service. Starting July 1, 2014, these financial institutions are required to turn over their data on US clients' and US persons' accounts.
Implementing FATCA is costly because many foreign financial institutions did not have the compliance systems and information technology in place to report on US persons' holdings. Banks are being forced to spend tens of millions of Dollars to upgrade their systems. And if they do not provide the information to the US, the penalties are extremely severe. The US government can levy a 30% withholding penalty on any business that the institution does in the US, including trading US Dollars, equities, bonds and fixed income instruments. Noncompliance effectively locks a firm out of the US markets.
TGR: FATCA was set up to stop people from cheating on their taxes; will it have some effect?
Edward Karr: FATCA goes after a mosquito with a sledgehammer – or in mining terms, uses a D11 bulldozer to move a small pebble. There are 7.6 million US citizens living outside the US who are caught up in this war on tax evasion. However, an organization called Republicans Overseas is launching a constitutional challenge to FATCA lawyered by Jim Bopp. He is the attorney who took down the McCain-Feingold campaign finance law in the Supreme Court. Bopp is confident that FATCA will be overturned.
TGR: Looking forward, then, what is the economic outlook in Europe for gold, commodities and stocks?
Edward Karr: The overall European economic outlook is the same muddle-through situation that has dominated the continent for the last couple of years: slow economic growth and possible deflation. After the financial crisis of 2008-2009, the US proactively recapitalized its financial system. The European banks still need to be recapitalized. The European Central Bank (ECB) has done a really good job in defending the euro, but the underlying problem of high debt levels on the banks' balance sheets has not been addressed.
Greece is not really a big problem, but keep a close eye on France. It has a very slow growth rate, high debt levels and is basically an economic train wreck in slow motion. In addition, we are seeing a resurgence of ultranationalism in the polls. Europe desperately needs inflation. Deflation, of course, is a central banker's worst nightmare. The bankers need inflation to avoid deflation. The ECB is going to have to start running the money printing presses around the clock. I just see no other way out of the dilemma. The banks can only inflate their way out of their crushing debt loads. And rising, higher inflation means higher interest rates, which is very positive for the gold markets.
TGR: How will higher interest rates impact the gold markets?
Edward Karr: As inflation and interest rates rise, so does the consumer demand for gold. People buy gold as a safe haven and a store of value. I have a positive outlook for gold and gold equities as Europe recapitalizes its banking systems and the prices of precious metals explode upward.
TGR: What about banking systems in other areas of the world?
Edward Karr: China escaped its last financial crisis with a massive government stimulus program. As a result, China is trapped inside one of the biggest credit bubbles in the history of the human race. Some people believe that when the bubble pops there will be a very hard landing. But with the stroke of a pen, the Chinese government can address economic issues much more effectively than a bunch of European bureaucrats sitting around a table.
TGR: Will inflation hit the US?
Edward Karr: Because the US banking system is in great relative shape, there will be a resurgence of domestic manufacturing. The US has a lot of land and has plenty of capital and technological savvy. It has abundant, cheap energy compared to the rest of the world. As the manufacturing economy takes off, inflation will gradually pick up there, too, which is positive for gold. Today's gold price of $1319 per ounce is the new base price, in my opinion. Precious metal stocks are extremely cheap right now. This is a great time to buy.
TGR: Thanks for your time.

The Gold Report is a unique, free site featuring summaries of articles from major publications, specific recommendations from top worldwide analysts and portfolio managers covering gold stocks, and a directory, with samples, of precious metals newsletters. 

See the full archive of Gold Report articles.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn



Market Fundamentals