Peter Schiff has been very outspoken on his show on the idea that a large increase in the interest rates will lead to massive bank failures. He was critical of the stress tests the fed ran earlier in the year on the banks because they did not assume interest rate hikes, which he felt would collapse the banks and prove that they were not sound. I never understood however, why interest rate increases in our situation should lead to bank failures. Why would this be so?
Rising interest rates will collapse the capital value (i.e., the market price) of assets banks hold. If they have existing T-bonds at 3% and interest rates on newly issue T-bonds rise to 6%, the price investors will be willing to pay for the 3% bonds collapses. When that happens, banks become insolvent.
When interest rate goes up, gold price will start going down. That makes sense because the cost of currency is higher.
Question: Treasuries that were issued at lower rates will crash since new treasuries will be issued with a higher rate of return. If so, wouldn’t those treasuries with low yield get dumped on the market? What will they buy with the money? My guess is gold, but that would create an unusual case where gold and interest rate go up at the same time? Is that a likely scenario?
Lower demand for existing Treasuries is somewhat it not completely counter-balanced by increases demand for new Treasuries. It’s not necessary for demand for gold or any other asset to go up under such conditions.
Gold prices and interest rates can rise together. It depends on what causes interest rates to rise. If the cause is price inflation, then the two can rise together. This happened in the late 1970s.