"Ask Robert" October 2010 - Answer
Q: Dear Mr. Kiyosaki, On the Alex Jones Show you stated the Fed might raise interest rates by 10%, crashing gold and silver. But wouldn't such a move crash the U.S.? Respectfully, S. Cribe
A: First off, let me make a clarification. I was using the 10 percent number as a hypothetical situation. I'm not claiming that the Fed is thinking of sending interest rates to 10 percent. What I was saying is that when you invest in anything it's important to watch the trends.
So, when it comes to gold and silver, it's important to watch the interest rates. Right now, gold and silver are doing very well because the interest rates are so low and the dollar is so depressed. However, if inflation started getting out of hand and the Fed were to panic and send interest rates sky-high, the dollar would rally and people would most likely sell off their gold and silver to get dollars. This would not be unprecedented. It happened under Paul Volcker in the 1980s.
The reason this can happen is because the dollar is a currency, a commodity really, just like gold and silver. Market forces like interest rates can dramatically affect the price of dollars relative to gold and silver or any other asset class. To learn more about this, I'd suggest you read Mike Maloney's book, Rich Dad's Guide to Investing in Gold and Silver.
The people I'm worried about are those who are financially ignorant—those who will jump in as gold reaches astronomical heights, only to lose it all when the bubble pops. Because people have no financial education, they follow the herd rather than think for themselves. My point is that if you have financial education, you can see how the trends in the market will affect your investments and then you can make the appropriate moves.
To your question about whether raising interest rates would crash the economy, the answer is probably yes. The reason rates are so low right now is because the Fed is trying to coax investors into creating more debt and moving their currency into more assets. This raises the price of those assets and gets more dollars into the economy.
In a market where investment activity is so low already, raising interest rates would cause asset prices to fall—probably significantly. So far the Fed has indicated they will sacrifice the dollar to keep the economy moving. But, as I asked on The Alex Jones Show, how do you know if the Fed is lying? Their lips are moving.
You never know what the Fed may do. I can't guarantee what will happen. But what I can guarantee is that those with a financial education and a high financial IQ will be able to identify what the Fed is doing, why they're doing it, and how it will affect their investments.
My point is this. Stay vigilant. Don't follow the herd. Invest first in your financial education. Your investments will be better for it.