Wednesday , 22 November 2017


Why Negative Real Interest Rates + Stimulative Money Supply = $10,000/ozt. Gold

Question: What do you get when you mix negative real interest rates with stimulative money supply efforts by global central banks? Answer: An exceptionally potent formula for higher gold prices that could send gold to the unimaginable level of $10,000 an ounce. [Let me explain further.] Words: 1049

So says Frank Holmes (www.usfunds.com) in edited excerpts from his original article*.

Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has further edited ([ ]), abridged (…) and reformatted the article below for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Who in the world is currently reading this article along with you? Click here to find out.

 Holmes goes on to say, in part:

 Negative real interest rates and strong money supply growth are two key factors of what I refer to as the Fear Trade. Negative real interest rates occur when the inflationary rate, or CPI, is greater than the current interest rate. A quick account of the G-7 and E-7 countries [in the table below] shows that the majority have negative real interest rates.

Across the developed G-7 countries, British citizens are the worst off with real interest rates in the U.K. sitting at negative 4.5 percent. U.S investors aren’t doing much better with rates at negative 3.25 percent and the Fed has all but guaranteed rates will remain there. Only Japan has a positive real interest rate among the G-7 and that rate is barely above zero.

Conversely, the most populous nations making up the E-7 have mostly positive real interest rates. However, the grouping’s grandest economic powerhouses, China and India, have negative real interest rates sitting around negative 2 percent.

world's interest rates
Click here to enlarge

Simply put, investors in those countries who have parked their savings in cash and low-yielding investments, such as Treasury bills and money market accounts in the U.S., are actually losing money due to inflation. That can be tough for any investor, but when you’re the central bank of a country with millions of dollars in reserves, it can be catastrophic. This is why central banks around the globe have sought protection by diversifying their foreign-exchange reserves into gold bullion this year.

VTB Capital’s Andrey Kryuchenkov told The Wall Street Journal this week that, “Central banks are diversifying, and it has intensified to a rate that nobody had expected.” Latest estimates predict global central banks will purchase between 475-500 tons of gold in 2011. This amount of capital flowing into gold has the potential to push prices up a level in 2012. John Mendelson from ISI Group sees gold prices reaching $2,200 an ounce during the first six months of 2012. While real interest rates look to remain in the red for the foreseeable future, many of these same countries are printing record amounts of “green” with accommodative monetary policies.

U.S. Global’s director of research John Derrick says central banks around the world have focused their attention on stimulating growth. Beginning with Brazil’s interest rate cut in late August through the European Central Banks (ECB) cut this week, there have been 40 easing moves by global central banks, according to ISI Group. John says this also means we will likely see more quantitative easing in 2012. The Bank of England has already started its quantitative easing, and many experts believe the ECB and the Federal Reserve will follow in its footsteps.

Bloomberg reports that global money supply (M2) is “set to increase the most on record in 2011.” The chart below shows the year-over-year change of global money supply has been gradually moving higher and higher since mid-2010.

money supply 1998-2011
Click here to enlarge

The reason global central banks have shifted the printing presses into overdrive is simple: they need the money. My long-time friend Frank Giustra reminded us of this new reality in an op-ed piece for the Vancouver Sun last week. Frank writes:

“The bottom line is that the money needed to bail out Europe and to fund America’s spiraling debt and future unfunded obligations is in the ten of trillions. IT DOES NOT EXIST. It has to be created by printing money in massive quantities, and despite all the rhetoric you will hear against such policies, in the end it’s the path of least resistance. Printing money is an invisible tax on savings, much easier to initiate, than, say, raising taxes or cutting back on services and entitlements.”

As central banks print money and increase supply, currencies become devalued. Whereas in the recent past, one currency may be reduced in value compared with other currencies, this time there is global competitive devaluation as excess liquidity is put into the system. Historically, this excess liquidity has made its way to riskier assets, i.e. stocks and commodities. Gold is generally a benefactor of this flight to riskier assets as many investors see it as a store of value. This chart illustrates the interconnectivity of gold and global money supply growth.

gold's value 1998-2011
Click here to enlarge

However, [the above] image doesn’t tell the whole story. While the price of gold has followed the same upward path as money supply over the past 14 years, it hasn’t been able to keep pace with M2 growth, says the Bloomberg Precious Metal Mining Team. In fact, if the global money supply were backed by gold, gold prices would be much higher, according to Bloomberg.

The yellow line below shows how gold would be greater than $5,000 per troy ounce if just half of global money supply were backed by gold. If all of the money supply in the world were to be backed by gold, the price of one troy ounce would need to rise above $10,000. It’s unlikely, of course, that this will happen, but it serves as a useful illustration for the disappearing value of the world’s fiat currencies.

m2 from 1997-2011
Click here to enlarge

Giustra reminds us that we have been down this path before saying, “When great nations mature and over-extend themselves, they revert to the paths of least resistance: borrow and/or print money. They all did it and they all failed; this time will be no different.”

The beneficiary of this type of event has historically been gold.

*http://www.usfunds.com/investor-resources/frank-talk/

Sign-up for Automatic Receipt of Articles in your Inbox or via FACEBOOK | and/or TWITTER so as not to miss any of the best financial articles on the internet edited for clarity and brevity to ensure you a fast an easy read.

Related Articles:

1. Stealth Taxation in the Form of Financial Repression is Coming! Here’s Why – and How

dollar sign
 
Financial Repression is a form of wealth confiscation and redistribution that is in some ways as effective as taxation – but the government never directly calls it that. It never appears in the budget (directly), and while it is dependent on a comprehensive network of laws and regulations – none of those go through the legislature with a stated intention of creating Financial Repression. So while the economic net effects are similar to a huge and comprehensive set of investor taxes being used to pay down the national debt, the “taxes” are never a campaign issue because voters and investors don’t understand what is happening – they only feel the results. [In this article I lay out for you what is slowly developing and expected to escalate dramatically in the next few years.] Words: 5800
 
 
global_economic_crisis
 
With most of the world’s major economies as well as the financial system bankrupt…most people will rely on governments and central banks to save us but how can anyone possibly believe that totally incompetent and clueless politicians and central bankers could solve the problem they created in the first place… The main objective of governments is to stay in power and thus to buy votes, therefore they are incapable of taking the right decisions and the opposition, aspiring to power, is even less suitable since they will lie through their teeth and promise the earth in order to be elected. So what is the solution? Read on! Words: 2391
 
 
Gold-bars-on-100-and-50-dollar-bill
 
When the supply of something is increased sharply relative to demand, the value of that commodity will decline. If the supply continues to increase rapidly and indefinitely, then that item will become worth less and less, with the potential to finally become nearly worthless. This is the Developing Disaster facing the US Dollar and the world. This is the factor that could become the single most important criterion in investment allocation decisions and possibly even for individual financial survival…[Let me explain this further by reviewing the 7 major problems facing the U.S. (and thus the world) and how they all will lead to problem #7 – devolution.] Words: 1520
 

4. “Financial Repression” May Soon Become Our Worst Nightmare! Here’s Why

A new financial policy initiative known by the label “Financial Repression” may soon become our worst nightmare. ‘Repression’ rhymes with ‘depression’ which could be what we have to look forward to as rampant price inflation and permanently lower living standards take hold. Get ready to be conscripted into a citizen army assembled for the greater cause of saving the nation from being swamped by a tsunami of debt. Let me explain. Words: 1585

5. Yes, the Debit Crisis Could Spread To The U.S.! Here’s Why

greece-dominos

[Unfortunately,] for the U.S….its budget deficit is growing in spite of the fact revenues into the treasury continue to grow…Given the low level of interest rates on the Treasury’s debt it would not take much of an interest rate spike in the U.S. to negatively impact the government’s budget. [So, in reply to the unspoken question on everyone’s mind, “Yes, the debit crisis could most definitely spread to the U.S.” Let me explain further.] Words: 633

6. Brace for Impact: U.S. About to Go Off a Financial Cliff!

us-dollar-meteor
 
The kind of impact [our economy is] going to have will not be like flying into the side of a mountain. It will be the kind of crash that skids over land, clipping trees and buildings until the plane ends up wingless in a smoldering heap. I just hope the fuel tanks don’t ignite when the long rough ride is over. [Let me explain.] Words: 832
 
 
crisis
 
It really is hard to find the words to describe the true horror of the national debt of the U.S. The U.S. government has been on the greatest debt binge in all of human history, and a day of reckoning is coming that is going to be so painful that it is going to shock America to the core. We have lived so far above our means for so long that none of us really has any concept of what “normal” is like anymore. The United States has enjoyed the greatest party in the history of the world, but now this decades-old party is ending and the bills are coming due. Our current system is headed for an inevitable collapse. There is no way of getting around it – a horrific economic collapse is coming [and] it is going to change the world. You better get ready. [Let me explain further.] Words: 1771
 
 
 
The new [debt ceiling deal] legislation will add $2.4 trillion to the $14.3 trillion national debt in a little over a year – and we don’t even start saving money until after the debt reaches $16.7 trillion! This bill doesn’t even cut the deficit. It just slows the growth of government spending to around 8% a year! So, even if Congress cuts $2.1 trillion out of the budget over the next 10 years, we will still be running annual deficits of more than $1 trillion…[That means that in addition to a deficit that will continue to grow we can look forward to a shrinking economy, an imploding U.S. dollar and exploding inflation. Some future! Let me explain.] Words: 827