The Fed is beginning to wake up to the fact that there is no easy escape from its artificial zero interest rate policy. The Fed will not be able to move very far off of the zero-bound range before the yield curve inverts and the U.S., and indeed the entire global economy, melts down. This means real yields will become more negative, the U.S. dollar will lose more of its purchasing power and economic instability will intensify over time—the perfect fundamental backdrop for rising gold prices.
This is an edited & abbreviated excerpt from an article (see original article* HERE) by Michael Pento.
…The reason to own gold is the same today as it has been for thousands of years: it is the perfect store of wealth. Gold is:
- divisible without losing its value,
- extremely scarce, and
- virtually indestructible.
It is simply the best form of money known to mankind.
The case for keeping your wealth in gold only becomes more bolstered when:
- real interest rates are negative,
- faith in fiat currencies is crumbling, and
- nation states are insolvent.
The massive and unprecedented Quantitative Easing programs and Zero Interest Rate Policies among the Bank of Japan, Peoples Bank of China, European Central Bank and Federal Reserve clearly show that Central Banks have no escape from manipulation of their bond market, currencies, equities and economies. Ms. Yellen’s recent tacit admission that the Fed Funds Rate must remain at zero percent for at least a full seven years was a clear validation of this premise…
With $44 trillion in total non-financial debt, which is up $12 trillion in the last 10 years alone, we have become a highly indebted nation that has become completely addicted to lower rates.
- The U.S. high-yield bond market, which was the catalyst of the 2008 financial crisis, has grown to $2 trillion in size–a full $1 trillion of these new loans have been added since 2009…
- According to CNBC, nearly two-thirds of the high risk Ginnie Mae guaranteed securities are issued by independent mortgage banks…and those independent mortgage bankers are deploying some of the most sophisticated financial engineering that this industry has ever seen. Sound familiar? With credit scores of 520 and down payments of just 3.5%, it is indeed clear that subprime mortgages are back with a vengeance. Therefore, a rise in rates would further cool the already lukewarm housing market… Rising interest rates would not cause renters to become homeowners. Instead, it would likely send the home price-to-income ratio, which is currently at 4.4, crashing back to its long-term average of 2.6.
- Turning to the interest paid on U.S. bonds, it is clear that mean reversion of the 10-Year Note would bankrupt the Treasury. This is because that average rate is north of 7%. If the Treasury was forced to service the existing $13.2 trillion of publicly traded sovereign debt at that rate it would take about 30% of all Federal tax revenue. Just imagine what will occur when rising rates cause the economy and revenue to decline, as deficits explode. Remember that annual deficits soared to $1.5 trillion during the Great Recession; and that was with interest rates plummeting towards 2%.
- And then we have emerging markets, where a rise in U.S. interest rates will reveal one of the great instabilities in the global economic system today. A total of $9.6 trillion in U.S. dollar denominated debt is owned by non-U.S. borrowers. When the U.S. dollar strengthens the cost to those foreign borrowers rises a lot. Emerging-market economies’ debt is now 167% of their gross domestic product, this is up 50 percentage points since the end of 2007, according to figures from the Bank for International Settlements…
- Turning back to the U.S. stock market, low interest rates have fueled a whopping $2.5 trillion stock buyback binge since the end of March of 2009. Higher interest rates would see the end of this corporate buyback scheme that provides an artificial boost to EPS and share prices.
- Let’s not forget the several hundred trillion dollars’ worth of interest rate sensitive derivatives, including credit default and interest rate swaps underwritten by institutions, which will have to once again crawl back to the government for another bailout once their bets become insolvent.
- Finally, seven years of ZIRP has forced pension plans far out along the risk curve in search of higher returns: vastly increasing the amount of equity exposure in the portfolios in an attempt to generate the necessary 9% average annual returns. The Dow Jones Industrial Average has already dropped to a two-year low without one single basis point rate hike in the last nine years…[so] if a cycle of rate hikes were to take place now it would not only bring increased competition for stocks but also help push the anemic global economy into a recession. The result would be that there wouldn’t be a solvent public or private pension plan in the entire nation.
As the credibility and effectiveness of central banks comes more into question, investors will seek comfort in gold because it is the sole monetary solution that has stood the test of time. This is why there is a direct inverse correlation between the faith in fiat currencies and the price of gold… Every few decades a reminder is needed that all fiat currencies throughout history have lost all of their value…
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