Savings Account Interest Rates Do Not Yet Share Gold Investors' View of Inflation
November 20, 2009
Savings Account Rates and Gold Prices: Which Is Right?
Gold prices recently soared to a new all-time high. Meanwhile, savings account interest rates remained stuck in their rut, at less than 1.5%. Each represents a viewpoint on the economy, and right now those two views are inconsistent with one another. Which one is right?
What Does Gold Have to Do with Bank Rates?
First, why should someone with a savings account care about the price of gold? The rally in gold suggests a couple of things that should ultimately affect savings account interest rates and other bank rates.
Gold is the classic inflation hedge--it's where some investors put their money when they think inflation is going to start rising. The price of gold has risen by more than 20% this year, suggesting that gold speculators feel there is more than a whiff of inflation in the air.
In this case, however, there is another factor in the rising price of gold, and that is concern about the US dollar. The unsteadiness of the US economy, coupled with the massive amount of debt the federal government has racked up, are leading some countries to openly question the US dollar's validity as the world's dominant trading and reserve currency.
Like many commodities, gold is traded in dollars. So, if investors start shying away from the dollar, it sends the price of gold upward, in dollar terms. It could be argued that what we are seeing is not simply a rise in the price of gold, but also a fall in the value of the dollar.
Even so, the rising price of gold is still an inflation signal. Whether gold investors are more concerned about inflation or the weakness of the dollar, the outcome could be the same for the US economy. A weak dollar makes imports more expensive--and in an economy that relies heavily on imports, that creates inflationary pressure.
Coming back to savings account rates, the disconnect between bank rates and the price of gold is that the low level of bank rates reflects the deflationary environment of the past year. Gold investors clearly think that environment is about to change. Bank rates have yet to reflect any such inflation concerns. Ultimately, only one of these views can be correct, and if it is the price of gold that accurately reflects the coming trend for inflation, then bank rates will have to rise.
Savings Account Rates: Stay Alert for Changes
This possibility of impending change means that depositors should stay alert for movements in savings account rates. Although those interest rates have been stagnant for a long time now, there are two things to remember about how inflation can affect the marketplace:
- Changes sparked by inflation can happen suddenly. It's not just that inflationary factors, such as the price of oil, can move quickly. It's also that once people start to anticipate inflation, other prices and interest rates can begin to overreact.
- Different banks will react in different ways. Some will be quicker to adjust rates upward to reflect an inflation trend than others.
Both factors mean you should check savings account rates more frequently than usual in this climate and look at a range of banks rather than just the overall average. Consider bookmarking Money-Rates.com to help you keep up if the market starts to change.
Source:
AFP • Gold price tops $1,090 for first time • Nov 04, 2009 • Yahoo! News: http://news.yahoo.com/s/afp/20091104/bs_afp/commoditiesgoldmetalsprice_20091104120903
