Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21
CISCO 2020 Dot com Bubble Stock vs 2021 Bubble Tech Stocks Warning Analysis - 6th Oct 21
Precious Metals Complex Searching for a Bottom - 6th Oct 21
FB, AMZN, NFLX, GOOG, AAPL and FANG+ '5 Waves' Speaks Volumes - 6th Oct 21
Budgies Flying Ability 10 Weeks After wings Clipped, Flight Feathers Cut Grow Back - 6th Oct 21
Why Silver Price Could Crash by 20%! - 5th Oct 21
Will China's Crackdown Send Bitcoin's Price Tumbling? - 5th Oct 21
Natural Gas News: Europe Lacks Supply, So It Turns to Asia - 5th Oct 21
Stock Market Correction: One More Spark to Light the Fire? - 5th Oct 21
Fractal Design Meshify S2, Best PC Case Review, Build Quality, Airflow etc. - 5th Oct 21
Chasing Value with Five More Biotech Stocks for the Long-run - 4th Oct 21
Gold’s Century - While stocks dominated headlines, gold quietly performed - 4th Oct 21
NASDAQ Stock Market Head-n-Shoulders Warns Of Market Weakness – Critical Topping Pattern - 4th Oct 21
US Dollar on plan, attended by the Gold/Silver ratio - 4th Oct 21
Aptorum Group - APM - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 3rd Oct 21
US Close to Hitting the Debt Ceiling: Gold Doesn’t Care - 3rd Oct 21
Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
Original Oculus VR HeadSet Rift Dev Kit v1 Before Facebook Bought Oculus - 3rd Oct 21
Microsoft Stock Valuation 2021 vs 2000 Bubble - Buy Sell or Hold Invest Analysis - 1st Oct 21
How to profit off the Acquisition spree in Fintech Stocks - 1st Oct 21
�� Halloween 2021 TESCO Shopping Before the Next Big Panic Buying! �� - 1st Oct 2
The Guide to Building a Design Portfolio Online - 1st Oct 21
BioDelivery Sciences International - BDSI - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 30th Sep 21
America’s Revolving-Door Politics Behind the Fall of US-Sino Ties - 30th Sep 21
Dovish to Hawkish Fed: Sounds Bearish for Gold - 30th Sep 21
Stock Market Gauntlet to the Fed - 30th Sep 21
Should you include ESG investments in your portfolio? - 30th Sep 21
Takeda - TAK - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 29th Sep 21
Stock Market Wishing Away Inflation - 29th Sep 21
Why Workers Are NOT Returning to Work as Lockdown's End - Wage Slaves Rebellion - 29th Sep 21
UK Fuel PANIC! Fighting at the Petrol Pumps! As Lemmings Create a New Crisis - 29th Sep 21
Gold Could See Tapering as Soon as November! - 29th Sep 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Gold Bull Market Real Interest Rates Critical Metric

Commodities / Gold and Silver 2012 Apr 04, 2012 - 02:03 AM GMT

By: Jeff_Clark

Commodities

Diamond Rated - Best Financial Markets Analysis ArticleJeff Clark, Casey Research : There are many reasons why gold is still our favorite investment – from inflation fears and sovereign debt concerns to deeper, systemic economic problems. But let's be honest: It's been rising for over 11 years now, and only the imprudent would fail to think about when the run might end.

Is it time to start eyeing the exit? In a word, no. Here's why.


There's one indicator that clearly signals we're still in the bull market – and further, that we can expect prices to continue to rise. That indicator is negative real interest rates.

The real interest rate is simply the nominal rate minus inflation. For example, if you earn 4% on an interest-bearing investment and inflation is 2%, your real return is +2%. Conversely, if your investment earns 1% but inflation is 3%, your real rate is -2%.

This calculation is the same regardless of how high either rate may be: a 15% interest rate and 13% inflation still nets you 2%. This is why high interest rates are not necessarily negative for gold; it's the real rate that impacts what gold will ultimately do.

What History Tells Us

The chart below calculates the real interest rate by extracting annualized inflation from the 10-year Treasury nominal rate. Gray highlighted areas are the periods when the real interest rate was below zero, and as you can see, this is when gold has performed well.

Gold climbs when real interest rates are low or falling, while high or rising real rates negatively impact it. This pattern was true in the 1970s and it's true today.

A closer study of this chart tells us there's actually a critical number for real rates that seem to have the most impact on gold. Take a look at how gold performs when real rates are at 2% or below.

The reason for this phenomenon is straightforward. When real interest rates are at or below zero, cash or debt instruments (like bonds) cease being effective because the return is lower than inflation. In these cases, the investment is actually losing purchasing power – regardless of what the investment pays. An investor's interest thus shifts to assets that offer returns above inflation… or at least a vehicle where money doesn't lose value. Gold is one of the most reliable and proven tools in this scenario.

Politicians in the US, EU, and a range of other countries are keeping interest rates low, which, in spite of a low CPI, pushes real rates below zero. This makes cash and Treasuries guaranteed losers right now. Not only are investors maintaining purchasing power with gold, they're outpacing most interest-bearing investments due to the rising price of the metal.

Here's another way to verify this trend. As the following chart shows, from January 1970 through January 1980 gold returned a total of 1,832.6%. This is much higher than inflation during that decade, which totaled 105.8%.

In the current bull market, gold has gained 556.3% since 2001, while inflation has thus far totaled 30%.

Further supporting this thesis is the fact that when real rates are positive, gold has not performed well. You can see this in the following chart of when real interest rates were higher than inflation.

The gold price fluctuated between $300 and $500 for the twenty-year period when rates were positive. This is a strong reminder that bull markets don't last forever – even golden ones – and that at some point we'll need to sell to lock in a profit.

So if history demonstrates that gold does well during a negative-rate environment and poorly during positive periods, the natural question becomes…

How Much Longer Will Negative Real Rates Last?

US Federal Reserve Chairman Ben Bernanke stated in January that he expects to keep short-term interest rates close to zero "at least through late 2014." This low-rate, loose-money policy is intended to "support a stronger economic recovery and reduce unemployment." While his strategy is debatable, this implies that almost any inflation at all will continue to keep the real rate negative and thus gold will stay in a bull market.

What if the economy improves? After all, there are economic data showing the economy may be finding its footing, making some believe interest rates could be raised earlier, as soon as next year. Based on the data above, the answer to the question is, "What does inflation do?" In other words, interest-rate fluctuations alone aren't important; it's how the rate interacts with the inflation rate. If inflation simultaneously rises and keeps the real rate negative, we should expect gold to remain in a bull market.

With the obscene amount of money that's already been printed, high inflation seems almost certain at some point, even if there isn't any more money creation. This is why we think the end to the gold bull market is not yet in sight.

One more point. You'll notice in the above charts that this trend doesn't reverse on a dime. It takes anywhere from months to years for investors to shift from interest-bearing investments to metals – and vice versa. And the longer the trend, the slower the change. Real rates have been negative for a decade now, and with broad institutional investment in gold largely still in absentia, it seems reasonable to expect that the trend in gold won't shift anytime soon.

Implications for Investors

Armed with these data, there are definite steps you can take with your investments at this point, as well as reasonable expectations you can have going forward:

  1. You can buy gold today. As long as real interest rates are negative, gold will remain in a bull market. If you already own some gold, you can and should ask yourself if it's enough at a time when money in the bank is a losing proposition.
  2. Don't get flummoxed when you hear talk about rising rates. Watch the real rate instead.
  3. In our opinion, real rates will be negative for some time for the simple reason that we think inflation will be rising for some time. Ask yourself: Will the Fed and other central banks raise rates aggressively enough to catch up to inflation? Someday, sure… but not anytime soon.
  4. When real rates turn positive, especially above 2%, it may be time to sell. We'll have to see what's going on in the world at that time; if there's financial chaos, the fear factor could cause gold to depart from this historic pattern. But even if not, keep in mind that while the price of gold fluctuates every day, the shift out of gold-based investments won't occur overnight. There should be time to gain clarity.

There are a lot of reasons to own gold today, and there will likely be more before it's time to say goodbye. In the meantime, we take comfort in the fact that the strongest historical indicator of all tells us the gold bull market is alive and well and has years to play out.

Carpe aurum.

[To learn more about the best ways to invest in gold today and in the months ahead, you won't want to miss this free call with two of Casey Research's seasoned metals analysts: Gold Investing in 2012 and Beyond: Your Questions Answered! Hurry if you want to get in on it – at midnight EDT on April 6, signups will close.]

© 2012 Copyright Casey Research - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 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