Monday , 2 December 2024

Low Real Interest Rates = Continued High Prices for Gold – but For How Long?

Why is it that the demand for gold moves inversely to interest rates – that the higher the rate of interest the lower the demand for gold, the lower the rate of interest the higher the demand for gold? [Let me explain why and what the future seems to hold.] Words: 1053

So says Rick Mills (www.aheadoftheherd.com) in edited excerpts from his original article*.

Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), may have edited the article below for length and clarity – see Editor’s Note at the bottom of the page for details. This paragraph must be included in any article re-posting to avoid copyright infringement.
[This variance in the price of gold vs. the level of real interest rates is referred to as Gibson’s Paradox and more can be learned about this in articles such as:

Mills goes on to say, in part:

The reason for this is simple, when real interest rates are low, at, or below zero, cash and bonds fall out of favor because the real return is lower than inflation – if your earning 1.6 percent on your money but inflation is running 2.7 percent the real rate you are earning is negative 1.1 percent – an investor is actually losing purchasing power. Gold is the most proven investment to offer a return greater than inflation (by its rising price) or at least not a loss of purchasing power.

Gold’s price is tied to low/negative real interest rates which are essentially the by-product of inflation – when real rates are low, the price of gold can/will rise, of course when real rates are rising, gold can fall very quickly.

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Dumping gold on the market, like the London Gold Pool, and until very recently modern central banks did, cannot dampen the demand for gold at low/negative real interest rates. They can temporarily be successful at capping or slowing gold’s price rise but as long as interest rates are low to negative the demand for gold will grow and soon strips supply from their vaults.

There’s a saying that “six percent interest can draw gold from the moon,” undoubtedly true, but rates below two percent draw investors to gold.

The Feds interest rate is 0.25 percent.

“the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent…at least through late 2014. The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities…This continuation of the maturity extension program should put downward pressure on longer-term interest rates” U.S. Federal Reserve Reaffirms Low-Rate Policy, June 20th 2012

The benchmark US 10-year note currently yields 1.62 percent, yields on 30 year bonds are 2.69 percent.

The following is the inflation data for the first five months of 2012 calculated from the Consumer Price Index (CPI-U) which is compiled by the Bureau of Labor Statistics (BLS): Jan 2.93%, Feb 2.87%, Mar 2.65%, Apr 2.30%, May 1.70%.

John Williams, author of the newsletter Shadow Government Statistics, says that if the BLS had not altered its statistical practices over the years then inflation would have been reported about seven percentage points higher each year. [He makes the points that:]

  1. Since 1913 the US dollar has lost over 95% of its purchasing power while gold has gone from US$20 an ounce to currently over US$1600.00 per ounce in the same time frame.
  2. When people catch onto the fact that all government statistics are so massaged as to be useless, and actually start to think about how much more they are paying today over yesterday for the necessary everyday items they need to get by, than they will start to understand why gold is so important to a sound monetary system.
  3. Continuing low interest rates, combined with higher inflation rates will equal low to negative real rates of return causing continued demand for gold.
  4. Consistent, sustained, large-scale bulk gold purchases on the dips by central banks and governments buying a large part of the annual supply of gold will keep a floor under gold’s price.

Conclusion

Facts:

  • as long as real interest rates are low gold is in a bull market,
  • there are no plans to raise interest rates for at least two years….

The above should be on everyone’s radar screen. Is it on yours? If not, maybe it should be.

*http://aheadoftheherd.com/Newsletter/2012/Six-Percent-Can-Draw-Gold-From-The-Moon.htm  (To access the article please copy the URL and paste it into your browser.)

Editor’s Note: The above article may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

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