Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

What The Economist Doesn't Know About Gold

Commodities / Gold and Silver 2010 Jun 23, 2010 - 03:21 PM GMT

By: Adrian_Ash

Commodities

Best Financial Markets Analysis ArticleTwo things happen to cash savers (meaning pretty much everyone) when real interest rates get stuck below zero...

HOW HAS GOLD reached and breached new all-time highs in the absence of strong 1970s-style inflation?


The Buttonwood column in last weekend's Economist is only the latest analysis to miss the point, and despite tripping right over it, too.

"Owning gold is traditionally seen as offering protection against inflation. And inflation is very bad news for owners of government bonds.

"But the ten-year Treasury bond yields just 3.3%, a level that is towards the low end of the historical range...You would expect the performance of gold and Treasury bonds to be inversely correlated. When gold was at its real all-time high in 1980, the ten-year Treasury-bond yield was 10.8%. Fixed-income investors had suffered years of negative real returns in the 1970s."

But there's the rub, as we never tire of telling people here at BullionVault. They tire so quickly of hearing it, however, that even The Economist can't square the circle of rising gold, falling bond yields. Because it never was inflation alone in the '70s that drove people to buy or sell a lump of rare, indestructible metal. It was rather the rate of return offered by cash and bonds – those better competitors as a store of wealth, all things being equal – over and above (or below) inflation.

That's why gold made a terrible inflation hedge in the 1980s and '90s, most especially for Dollar investors. Because no-one needed an inflation hedge! Not when 10-year Treasuries paid 4.3% on average over and above CPI inflation. Not when the real Fed Funds rate averaged 3%-plus...leaving gold to drop three-quarters of its real Dollar value inside 20 years...as the real value of cash-on-deposit doubled.

Now compare and contrast with the last eight-and-a-half years. CPI inflation has averaged barely half its previous two-decade average, yet the real returns paid to bonds and cash have collapsed. Adjusted for inflation, in fact, the real Fed Funds rate has now been below zero for 54 of the last 101 months. That matches the 54 months of sub-zero real rates which the Fed delivered in the 1970s...

...but things are worse yet, of course. First because that decade's 54 months of negative real rates were spread across 10 full years from Jan. 1970. So second, the overall effect on the average real rate since 2002 has been to drive it lower again.

Real Fed Funds

Overall ave. real rate

Neg. months

Neg. ave.

1970-1980 0.01 54 -1.49
2002 to date -0.12 54 -1.37

Short of a revolution in Fed thinking (no sign of that today), the decade starting Jan. 2002 looks set to deliver yet more negative real rates before 2012, if not beyond. Which will continue to mean that:
 

  • Holding cash-on-deposit guarantees a loss of real value, something that even the most passive, cautious savers will only put up with for so long;
  • The opportunity cost of holding gold or silver – the foregone interest you'd otherwise receive on cash – remains absent.

The monetary metals may not have been official money for many decades today. But the Fed's interest-rate policy is actively leading the remonetization of gold and silver as popular stores of value.

Because when "risk free" cash keeps paying a guaranteed loss, then a growing number of people will, in due course, start seeking shelter elsewhere. At the same time, holding gold and/or silver has ceased being a burden (bullion storage rates need not be onerous), inviting fresh flows of retained capital, tired of earning nothing or less.

Real returns to cash have now been low-to-negative for almost a decade, and so it might not be too long before a far broader, and thus larger, volume of savings turns from cash to the obvious and historic alternatives. Either that or the Fed will hike rates so high, you get 4% and more above inflation.

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2010

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in