Gold's Old Friend Comes Back / Commodities / Gold and Silver 2018

RememberLIBOR? The interest rate which soared during the global financial crisis? It’son the rise again, but almost no one is paying adequate attention to it. We are– and we will analyze for you what this means for thegold market.

Hello LIBOR,My Old Friend
Simon and Garfunkel sang about darkness, the oldfriend. We can refer these words to LIBOR which has come to talk with us again.I bet you remember the GreatRecession well. But let me briefly remind youthat LIBOR soared in2008 as banks were reluctant to lend to each other. The stress in the financialsystem fueled fears, increased risk premia and madeLIBOR rise. Gold shined then. Just see the chart below.

Chart 1: 3-Month LIBOR, based on U.S. dollar from 2004to 2018.

Have you noticed the spike in the worst phase of thecredit crisis? We marked that development by a yellow rectangle. But there is asecond rectangle as well – much more disturbing, as it covers the present. Arewe all doomed?

LIBOR IsRising – Are We Doomed?
As the chart above shows, companies are paying themost in nearly a decade for borrowing indexed to LIBOR. Since 2016, the LondonInterbank Offered rate, which is the interest rate at which large global banks offerto lend funds to one another in the international interbank market, has risenfrom 0.61 to 2.27 currently. Does that increase signal the next financialcrisis?

Well, not necessarily. As the Fed has beenlifting the federalfunds rate, the LIBOR had to rise as well.

However, the pace of increases in LIBOR has recentlyaccelerated, outpacing the U.S. central bank actions. It shows serious signs of stress in the U.S. money markets. Thespread between LIBOR and OIS, which is a popular indicator of distress in thebanking sector, has jumped from 0.10 percent in November 2017 to almost 0.60percent today.

Now, the key question is what the reasons behind thatstress are. As in 2008, it might be a harbinger of another banking crisis,that’s for sure. But the recent surge in LIBOR seems to have been driven bytechnical factors. You see, Trump’s tax reform eliminated the incentive forU.S. companies to hold cash overseas. The repatriation of that cash led tolower demand for commercial paper, which in turn contributed to the rise inLIBOR. Not to mention the Fed’s unwinding of its balance sheet, new U.S.Treasury issuances, and the implementation of the Base Erosion Anti-Abuse Tax.Hence, the recent surge in LIBOR seems to be striking, but it doesn’t reflectthe same panic mode as in 2008. Sorry, gold bulls.

Implicationsfor Gold
We are watching LIBOR closely. In the Gold News Monitor from August 25, 2016, weaddressed the issue of rising LIBOR (it hit a 7-year high then). We calmedinvestors that the increase was caused by new U.S. money market rules. Now,LIBOR is again on the rise. Actually, it climbed to the highest level since2009, attracting some attention. However, the fears seem to be overblown, asthe current rise seems to stem from technical factors, not from a bankingpanic.

Having said that, the rise in LIBOR may affect thegold market, even without the next financial crisis. Higher interestrates may put some downward pressure onthe yellow metal, but they may also worry investors and spell trouble foroverleveraged companies. Gold may benefit then as a safe-havenasset (with higher LIBOR, the Fed mayalso adopt a more dovish stance),but investors shouldn’t expect a replay of 2008-2009, at least not yet.

If you enjoyed the above analysis and would you like to knowmore about the gold ETFs and their impact on gold price, we invite you to readthe April MarketOverview report. If you're interested in the detailed price analysis andprice projections with targets, we invite you to sign up for our Gold & SilverTrading Alerts . If you're not ready to subscribe at this time, we inviteyou to sign up for our goldnewsletter and stay up-to-date with our latest free articles. It's freeand you can unsubscribe anytime.

Arkadiusz Sieron
Sunshine Profits‘ MarketOverview Editor

Disclaimer

All essays, research and information found aboverepresent analyses and opinions of Przemyslaw Radomski, CFA and SunshineProfits' associates only. As such, it may prove wrong and be a subject tochange without notice. Opinions and analyses were based on data available toauthors of respective essays at the time of writing. Although the informationprovided above is based on careful research and sources that are believed to beaccurate, Przemyslaw Radomski, CFA and his associates do not guarantee theaccuracy or thoroughness of the data or information reported. The opinionspublished above are neither an offer nor a recommendation to purchase or sell anysecurities. Mr. Radomski is not a Registered Securities Advisor. By readingPrzemyslaw Radomski's, CFA reports you fully agree that he will not be heldresponsible or liable for any decisions you make regarding any informationprovided in these reports. Investing, trading and speculation in any financialmarkets may involve high risk of loss. Przemyslaw Radomski, CFA, SunshineProfits' employees and affiliates as well as members of their families may havea short or long position in any securities, including those mentioned in any ofthe reports or essays, and may make additional purchases and/or sales of thosesecurities without notice.

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.