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Observations On The Correlation Between Gold Price And Rates... Or The Complete Lack Thereof

Tyler Durden's picture





 

One of the specious and false memes circulating among the faux-punditry, which is undoubtedly based on a few months worth of amateur observations, is that gold is supposed to correlate inversely with interest rates. Presumably the logic goes something like this: instead of buying gold, it makes more sense to take one's money and buy $4.99 grande lattes, as it will be $6.99 tomorrow. So sell now. Fair enough, and on the surface this almost makes sense. Too bad it is completely wrong. If those same people who base their observations on one quarter of a business cycle maybe had the tools to extend their analysis a little further back, they would find that gold correlates with 10 year rates... in absolutely no way (with one very notable exception).

Exhibit A: Correlation plot between gold and the 10 Year since 1980.

Exhibit B: Tabular correlation between gold and the 10 Year: not the correlation coefficient.

Exhibit C: And just to confirm, there is no correlation between gold and stocks either.

Why start at 1980 one may ask? Great question. Because going just a little back shows the one true outlier to our statement... And the one that totally blows the opposing argument out of the water. To wit: when 10 year rates exploded in the end of 1979 and early 1980, and only the last minute intervention by Paul Volcker prevent an all out out of control inflationary episode (when the 10 Year moved from 9% to 13.% in 6 months), gold...doubled, and hit its all time inflation adjusted prices of over $800/ounce. In other words, a surge in rates resulted in the biggest break out in gold in history.

Gold price in 1980:

And 10 Year rates in 1980:

So hopefully this will end all debate over how the price of gold correlates with rates. It doesn't. What it does correlate with, is the propensity of the US economy to go down the shitter, and will certainly surge in a comparable demonstration of a self-imposed gold standard by the time the bond vigilantes come to the conclusion that it is time to redecorate the living room furniture. Ironically, the only thing that can crash the price of gold is if Bernanke, just like Volcker before him, does the right thing, and proceeds with the biggest tightening episode in recent US history. Everything else is smoke and spurious correlation (as for the probability of Bernanke tightening, that is worth another zero-word post altogether).

 


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Wed, 12/15/2010 - 22:39 | Link to Comment Xibalba
Xibalba's picture

Looks like a pound of gold and a pound paper are in fact different after all.  

Thu, 12/16/2010 - 01:38 | Link to Comment Oracle of Kypseli
Oracle of Kypseli's picture

Actually they are different as paper is weighted in avoirdupois pounds and gold is weighted in troy pounds which is 1.215 avoirdupois pounds.

Gold is always best.

This question was in a mensa IQ test.

One question that I missed was were Lenin was burried. My answer was: In a communist "plot"   

Thu, 12/16/2010 - 10:54 | Link to Comment Drachma
Drachma's picture

Thanks for confirming the arbitrariness and invalidity of IQ tests.

Thu, 12/16/2010 - 15:01 | Link to Comment Hook Line and S...
Hook Line and Sphincter's picture

 'In a communist "plot"'

prrrr..chhhh!  Good one Oracle!

Thu, 12/16/2010 - 02:44 | Link to Comment chopper read
chopper read's picture

THATS WHAT I'VE BEEN SAYING!  :)

 

Remember, when rates were raised to 10% in 1979, gold was still on a rapid rise in sympathy with rampant inflation.

http://www.sharelynx.com/chartsfixed/FedFundRateGold.gif

 

 

http://www.zerohedge.com/forum/fiat-paper-bubble-run-your-lives

Thu, 12/16/2010 - 07:38 | Link to Comment scatterbrains
scatterbrains's picture

Actually to my way of viewing those last charts you'll notice when you draw a resistance line across the previos peak on the 10yr from Oct. 79 to Jan. 80. Once rates broke above that line (Jan. 80) gold then collapsed by almost half.  Regardless we know that the fed is not about to jack rates up anytime soon so no worries there. However if the bondzilla steps in and takes charge then I disagree with Tyler on this one and would expect a *short term* correction/buying oppertunity.

Thu, 12/16/2010 - 07:50 | Link to Comment Raymond K Hassel
Raymond K Hassel's picture

I would think the correlation lies more with higher vs lower rates, where the relationship would be inverse all else equal, as opposed to rising vs falling rates, where it would intuitively be direct.  If rates are rising, then by definition, there are more sellers of bond paper than buyers, and that excess cash is going into other markets, ie gold.  Once yields reach a new and higher equilibrium, gold, all else equal (repayment risk ignored) certainly would lose luster

Thu, 12/16/2010 - 08:03 | Link to Comment scatterbrains
scatterbrains's picture

I agree so the question is where is that equilibrium zone in today's market. The battle today is Inflation/deflation could that mean gold has a lower equilibrium zone ?

Thu, 12/16/2010 - 08:32 | Link to Comment Alex Kintner
Alex Kintner's picture

The man on the teevee said that gold is cheaper now than in 1980 if you look at inflation adjusted price. But the only inflation adjusted chart I could find stops at 2006. Quite a price spike around 1980.

http://goldprice.org/inflation-adjusted-gold-price.html

Anyone have a chart that goes to present?

Wed, 12/15/2010 - 22:40 | Link to Comment erik
erik's picture

Irish poll today shows that the parties opposing the bailout gained considerable ground in the last two months.  They now outnumber the parties who supported the bailout.  The next election will be interesting.

http://www.irishtimes.com/newspaper/frontpage/2010/1216/1224285655638.html

Of course the Irish govt voted for the bankers today and not for the people in approving the EU/IMF deal, even though it was only a symbolic vote.

Wed, 12/15/2010 - 22:41 | Link to Comment Turd Ferguson
Turd Ferguson's picture

Great stuff, Tyler!

I found this video tonight. The great Yra Harris was on CNBS this morning. He also had some very interesting comments on the current bond selloff. 

http://www.cnbc.com/id/15840232?video=1697024530&play=1

Wed, 12/15/2010 - 22:41 | Link to Comment tmosley
tmosley's picture

Unfortunately, Bernanke can't raise rates.  It would cause the US to collapse instantaneously under the weight of its debt.

Look at that, a risk free trade.  How very rare.

Thu, 12/16/2010 - 01:36 | Link to Comment akak
akak's picture

tmosley, your gloom-and-doom rant against Bernanke and the dollar is completely wrong, WRONG I tell you!  The US would NOT "collapse instantaneously" if interest rates were to significantly rise!

I suspect that in fact it would take a few days.

;-)

Thu, 12/16/2010 - 03:24 | Link to Comment ATG
ATG's picture

Bernanke can't raise rates

Meanwhile, maybe it's Volcker Time

Irates rise with gold targeting much higher, $1610 in the case of gold

http://stockcharts.com/charts/gallery.html?s=%24gold

Bill rates target a triple

http://stockcharts.com/charts/gallery.html?$IRX

Bond rates target up 172 basis points

http://stockcharts.com/charts/gallery.html?$TYX

Evans found no relationship between deficits and interest rates throughout US History

http://www.jstor.org/pss/1812704

Goodfriend found no relationship between money supply and interest rates

http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6V8D-46VV5H4-2...

Barsky found a negative relation between real interest rates and gold production

http://deepblue.lib.umich.edu/bitstream/2027.42/26845/1/0000405.pdf

Taylor found monetary policy that correlated interest rates with inflation reduced inflation and increased productivity

http://www.stanford.edu/~johntayl/Onlinepaperscombinedbyyear/1999/An_His...

Greenspan wrote in 1966 gold and freedom were inseparable and noted interest induces gold owners to deposit their gold in fractional reserve banks

http://earthsociety.org/public_ftp/Gold_And_Economic_Freedom.pdf

He noted in 2007 Monetary policy cannot treat fiat money as gold backed money

http://www.bombaybookclub.com/download/Age%20Of%20Turbulence.pdf

Nice charts TD and TF

There may be an exception to prove every rule

Wed, 12/15/2010 - 22:44 | Link to Comment Caviar Emptor
Caviar Emptor's picture

How anyone can expect rules and correlations to apply in this total manipulated casino of a market is beyond reason. 

With price discovery mechanisms all neutered and short-circuited there's only 1 thing that moves anything: Fed liquidity and the schedule on which it gets dispensed. Without it the Dow would be 1,000 and Gold would be 10,000. 

Wed, 12/15/2010 - 22:46 | Link to Comment bigdumbnugly
bigdumbnugly's picture

"Ironically, the only thing that can crash the price of gold, is if Bernanke, just like Volcker before him, does the right thing, and proceeds with the biggest tightening episode in recent US history. Everything else is some and spurious correlation."

fat chance of that.  bernanke has crossed the Rubicon with the stimulus route.  ain't no turning back now. 

what could happen i suppose is that he is removed and the next chairman opts for austerity.  long odds of that too, though.

Wed, 12/15/2010 - 23:03 | Link to Comment eigenvalue
eigenvalue's picture

The next chairman will not be able to adopt drastic tightening either. If he should do so, US would default because of the massive debt. The Dollar would become arsewipe and people would swarm into precious metals. 

Bottom line: gold would rise either way.

Wed, 12/15/2010 - 23:05 | Link to Comment Caviar Emptor
Caviar Emptor's picture

I don't think radical tightening would more than dent gold's trend. 

That's because unlike during Volcker's time, faith in the dollar is not as strong as it was. There's lots of reasons for this, but alarming debt/GDP, ballooning twin deficits, offshoring of capital and growth of significantly competitive foreign markets is only a short list. 

Gold is the dollar hedge and interest rates won't change that much. Fear of big change in global reserve currency will keep gold buoyant through high demand for physical from foreign CBs and private sources everywhere. 

Thu, 12/16/2010 - 03:27 | Link to Comment ATG
ATG's picture

Take a look at annual change in monetary base and tell US with a poker face BSB's not tightening:

http://research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=BASE&s[1][transformation]=pc1

 

 

Wed, 12/15/2010 - 22:46 | Link to Comment ReallySparky
Wed, 12/15/2010 - 22:49 | Link to Comment Turd Ferguson
Turd Ferguson's picture

Sparky, let me answer the central question of the article: YES

Wed, 12/15/2010 - 22:51 | Link to Comment ReallySparky
ReallySparky's picture

I guess then that you are like me.  We both have a sight account.  Our gold is where we can see it.

Thu, 12/16/2010 - 00:22 | Link to Comment technovelist
technovelist's picture

Yep.

Thu, 12/16/2010 - 01:01 | Link to Comment trav7777
trav7777's picture

what???  Bankers running a fractional scam?  This flies in the face of their 2000 year history...oh wait, no it doesn't

Thu, 12/16/2010 - 05:12 | Link to Comment StychoKiller
StychoKiller's picture

"I am shocked, shocked to find that gambling is going on in this establishment!"

Wed, 12/15/2010 - 23:07 | Link to Comment Spalding_Smailes
Spalding_Smailes's picture

Jun 15, 2009 - The international derivatives exchange Eurex announced today that it will extend its single commodity product offering with new futures and options based on silver on 15 June 2009. Like the previously launched gold derivatives, the silver products are US dollar ...The international derivatives exchange Eurex announced today that it will extend its single commodity product offering with new futures and options based on silver on 15 June 2009. Like the previously launched gold derivatives, the silver products are US dollar denominated and cash settled contracts: They will be based on the benchmark London silver fixing.

 

 

 

Dec 2006 - The Bank of International Settlements reports the gold derivatives market hit a peak of $640 billion dollars in December 2006. Murphy emphasizes that tracing the derivatives back to central bank gold transactions and determining precisely the degree to which ...The BIS reports the gold derivatives market hit a peak of $640 billion dollars in December 2006

 

......"The gold standard was abandoned in 1971. Under a gold standard, you can't have derivative markets. It doesn't make sense to trade options under an international gold standard. It wasn't until after the abandonment of the gold standard that derivatives markets took off. Central bank subsidized negative real interest rates feed the derivatives markets. With fiat debt-based money, central banks can subsidize low interest rates."......http://fskrealityguide.blogspot.com/2008/02/black-scholes-formula-is-wro...

Thu, 12/16/2010 - 01:15 | Link to Comment destraht
destraht's picture

I love my silver options but I'd rather have my country back. :(

Wed, 12/15/2010 - 22:48 | Link to Comment Thomas
Thomas's picture

The outlier from the 70s has been so patently obvious; no higher math needed on that one. Anybody worried about it would have done that quick cross check.

Thu, 12/16/2010 - 01:20 | Link to Comment destraht
destraht's picture

This problem is so deep that you can approach it from an Illuminati conspiracy, spirituality, economic or sociological angle? Shit you can come at it from a biological angle. Did I miss anything. Oh software and a stretch but maybe even astrological angle. Its all tore up.

Wed, 12/15/2010 - 22:51 | Link to Comment lsbumblebee
lsbumblebee's picture

Tightening is out of the question, since Bernanke and Friends own more paper than anyone else.

Wed, 12/15/2010 - 22:55 | Link to Comment bob_dabolina
bob_dabolina's picture

Correct me if I'm wrong but it appears the bond market is tightening for Bernanke.

Wed, 12/15/2010 - 22:56 | Link to Comment lsbumblebee
lsbumblebee's picture

"For Bernanke"?

Wed, 12/15/2010 - 23:02 | Link to Comment bob_dabolina
bob_dabolina's picture

As in...Bernanke won't have to raise rates. The rates are already rising (with sudden and efficient promptness)

Wed, 12/15/2010 - 23:09 | Link to Comment lsbumblebee
lsbumblebee's picture

Then why is the Fed buying treasuries like a wired junkie?

Wed, 12/15/2010 - 23:45 | Link to Comment bob_dabolina
bob_dabolina's picture

The Fed is a wired junky.

The Fed is influencing the interest rate but ultimately the bond market is too big for even Ben.

Thu, 12/16/2010 - 02:38 | Link to Comment Shameful
Shameful's picture

Nothing is to big for Zimbabwe Ben. His dollar cannon is big beyond reasoning. Take the number 1 now add 4932 zeros behind it, that is roughly the amount of dollars Ben can wizard into existence. This number is so vast it is beyond most human comprehension. For comparison the estimated number of atoms in the universe is 8.8 × 10 ^ 79. The entire derivative market wouldn't even be a fart in a hurricane compared to what Ben can unleash in a moments notice. 1.1897 * 10^4932 vs 1.5 * 10^12.

Nothing is out of play, especially when Ben accepts the fact the dollar is doomed anyway. Could be the man who buys the universe.

Thu, 12/16/2010 - 04:35 | Link to Comment Bananamerican
Bananamerican's picture

in that case i'd say the bond market is puckering for Bernanke.

Thu, 12/16/2010 - 04:55 | Link to Comment Temporalist
Temporalist's picture

"Could be the man who buys the universe."

 

But I ain't sellin'!

Thu, 12/16/2010 - 05:19 | Link to Comment StychoKiller
StychoKiller's picture

Which places a value of roughly 1.35 ^ 61 per atom -- we're getting ripped off! :>D  (Edit: meh, my calculator and wetware overflowed!)

Wed, 12/15/2010 - 22:55 | Link to Comment AUD
AUD's picture

Yeah, I've stopped bothering to record daily govt bond data, the benchmark rate doesn't seem to influence anything much. Spreads of lower rated credit over govt bonds, that seems to be the key.

a surge in rates resulted in the biggest break out in gold in history.

I wouldn't even agree with this statement. Not only did the peak in rates occur almost 12 months after the peak in the gold price in 1980, the UST bond is priced in US dollars, but the US dollar is the liability of the Fed which holds the UST bond as the 'asset' to match its liability. The 'price' of the UST bond changing when 'priced' in US dollars is kind of like saying a ounce of .999 fine gold is worth 2 ounces of .999 fine gold, ridiculous.

I have trouble understanding how the charade has continued since 1971, what with all the mayhem it has & will continue to cause.

 

Wed, 12/15/2010 - 23:09 | Link to Comment Caviar Emptor
Caviar Emptor's picture

What burst the bubble in 1980 was when the US and the Saudis reached an accord on oil after the post-Iran embargo causing an oil shock. 

The motives for the gold trend this time are much different and not based on a one-off oil shock. It's dollar anxiety and that's been building for 10 years. It will only get worse, rate hikes and tightening won't change that but for brief moments.

Thu, 12/16/2010 - 01:04 | Link to Comment trav7777
trav7777's picture

yes, it is absolutely critical to understand what arrested the dollar's collapse post US-peak.  We were able to insource foreign production and continue the ponzi.  Our debt was backstopped by production based upon others' energy reserves.

It wasn't Volcker.  The USSR did not have the option to do this in 1989.  Subsequently, the ruble went to 0

Wed, 12/15/2010 - 22:56 | Link to Comment dussasr
dussasr's picture

Tyler, great data.  Do you have the data to check correlation using real interest rates vs gold?  I apologize for not remembering the source, but I remember reading a credible study that showed a good correlation between real interest rates (interest rate - inflation rate) and gold prices. 

 

The reasoning is that gold has negative yield (you have to pay someone to store and guard it) so when real interest rates are also negative that there is little penalty to own gold so gold does well.  However, when real interest rates move up, gold retains it's negative yield so there is a penalty to own it.

Wed, 12/15/2010 - 23:04 | Link to Comment bob_dabolina
bob_dabolina's picture

Bury that shit and simplify your life.

Make a treasure map for extra excitement.

Thu, 12/16/2010 - 00:26 | Link to Comment delacroix
delacroix's picture

not if the price rises, faster than the interest rate. interest rate- inflation rate= real gain

Thu, 12/16/2010 - 01:42 | Link to Comment akak
akak's picture

The reasoning is that gold has negative yield (you have to pay someone to store and guard it)

Why?

Not attacking you in any way, Dussasr, as I realize you are just repeating "conventional wisdom" (a phrase which is about as oxymoronic as "military intelligence"), but it is sad to see how many sheep ---- yes, SHEEP --- continue to buy the lies of the banksters and kleptocrats that one should never, EVER actually take one's assets, and financial security, into one's own hands.  How DARE the peons take charge of their own wealth!  Heresy!

Thu, 12/16/2010 - 08:12 | Link to Comment dussasr
dussasr's picture

Don't get me wrong, akak.  I favor owning gold.  I also think it's ok to keep a small amount hidden/buried somewhere for emergencies.  For larger amounts though you need to pay to pay to guard/insure it. 

To not guard/insure it is like saying you are not going to get fire insurance on your house because you are not going to let it burn down.   Also, if you are going to try to guard the gold yourself you will need to expend time, effort, and resources to do so (like buying guns, digging holes in the basement, etc).  In this case you have simply hired yourself to be the guard instead of hiring someone else.  Either way you must recognize the cost or you are not being honest with yourself.

Again, I do favor gold ownership.  It's just that gold is more attractive to own when real interest rates are negative.

 

Wed, 12/15/2010 - 23:06 | Link to Comment truont
truont's picture

Faux meme: gold is supposed to correlate inversely with interest rates.

This is indeed false.  Gold is inversely correlated to real interest rates.  Not nominal rates.

Example:  in 1980, interest rates were just under 20%.  And gold was skyrocketing.  Only when Volcker pushed rates above 20%, and surpassed the perceived inflation rate at that time, then gold fell, as investors could realize a real rate of return through buying government debt. 

Fast Forward:  Do we have real interest rates today?  No, we do not.  In fact, quantitative easing is just a proxy/substitute for negative real interest rates, which  Krugman and other "Keynesanians" have been pushing for years.  Negative real interest rates will incentivize people to speculate and spend.

That is why gold is going up.  Because we have negative real interest rates, or, the rate of inflation is greater than the rate of return from debt right now.

Wed, 12/15/2010 - 23:07 | Link to Comment THE DORK OF CORK
THE DORK OF CORK's picture

Did Paul Volcker really save America or was he its primary agent of Destruction.

Lets forget about his role in the Nixon administration and concentrate on the outcome of his actions as FED chairman.

When he pushed interest rates to 20% what happened to the productive economy - it migrated.

His actions sustained a artificially strong currency with massive buying power - however physical capital formation was no longer viable when rates were so high.

In effect these hugh rates promoted the capital depletion of the economy.

The dollar could still buy things so therefore Industry using other currenies grew by feeding the dollar slaves of the US.

The monetory aggregates still grew exponentially.

More then anybody alive today Big Paul was the father of Americas destruction.

Wall street loved the man because he funnelled income directly to speculators and not to creators.

The value of Gold exceeded for a short time the value of dollars in circulation - yet he chose not to renter the Gold standard.

Wed, 12/15/2010 - 23:17 | Link to Comment Caviar Emptor
Caviar Emptor's picture

In December, 1980, OPEC oil price collapsed as Saudi Arabia undercut the price on its own (under covert accord with the US). That popped the oil-shock-induced inflation spike and calmed markets. Volcker (and Reagan) took credit for "slaying inflation" through stupid Fed tricks. That's what they "fed" to the US public ever since.

Thu, 12/16/2010 - 01:12 | Link to Comment trav7777
trav7777's picture

totally correct.  US oil production's decline forced BW to collapse and along with it, the dollar.  Only insourcing Saudi production gave us the energy reserves growth needed to support our currency.

It really fundamentally is all about trade flows.  In the BW world, gold flowed, now forex does.  Nations who can produce and have exports commensurate with debt do not see forex collapses.  The US on the other hand is a voracious importer and deficit spender.  We've survived by putting most of the ME into the dollar zone.

If we take a look at the collapse of BW1, and we extrapolate that to BW2, we will see the dollar utterly collapse as the basic solvency of the US is in question.  There isn't another saudi arabia out there to support continued growth like there was in the 70s.  We are facing the same type of decline as visited the USSR.

Thu, 12/16/2010 - 09:20 | Link to Comment Escapeclaws
Escapeclaws's picture

Given that Volcker knows what he's up to, channeling money to Wall St must have been his express intention. Another case of never letting a crisis go to waste--pure opportunism. Maybe CD or someone could post an article on "opportunism as the leading directive of public policy" or some such title. It certainly seems time to discuss this idea since we have already discussed lying, cheating, and stealing.

No wonder Obama keeps Volcker around...

Wed, 12/15/2010 - 23:07 | Link to Comment mark mchugh
mark mchugh's picture

There's more to the story...

1980 also marked the beginning of the 401k era (still the biggest bestest bailout Wall Street ever got).  It exploded the mutual fund industry by a factor of 500.

It forced Joe Sixpack into stocks and bonds....but not gold.  It was a not-so-subtle way of dictating what toys we were allowed to play with.

You have to go back to the '70s (before Wall Street got the IV drip from Main Street) to understand the connection.

Wed, 12/15/2010 - 23:24 | Link to Comment Caviar Emptor
Caviar Emptor's picture

In 1979-1980 the gold bubble simply shadowed the oil price bubble, which interest rates followed one step behind the curve. It all ended when he Saudis broke away from OPEC and flooded the market with cheap oil. 

The motives today behind gold appreciation are much different. It's the very obvious long term chart of the dollar index which reflects a general loss of both value in faith in the currency. And since it's still in the sensitive position of global reserve, there are larger concerns. That has drawn in many many significant players. And dollar turmoil is not going to end anytime soon with ever more nations insolvent and the global banking system in the lurch

Thu, 12/16/2010 - 00:07 | Link to Comment mark mchugh
mark mchugh's picture

All good points -

I have no first-hand memory of these events (I smoked a lot of weed back then), but I have theorized that oil and gold had a chicken-egg relationship.  In other words, because the US now refused to settle in gold, OPEC trying to maintain the gold-oil ratio ad hoc.  And hilarity ensued...

Thu, 12/16/2010 - 01:14 | Link to Comment trav7777
trav7777's picture

both oil and gold are real things whose dollar prices rose.  The same was true of other commodities.

Thu, 12/16/2010 - 01:37 | Link to Comment Hicham
Hicham's picture

Damn I like this forum. There are a ton of interesting insights that really force me to think  laterally

Thu, 12/16/2010 - 02:42 | Link to Comment AUD
AUD's picture

What did the Saudi's receive in return, except a fistful of paper?

I don't believe the Saudi's could have done it alone, though maybe if other countries agreed to bend over...just maybe if the Saudi's were confident they would not get caught holding the USD bag?

Interestingly, RBA data shows an aggressive run up in foreign exchange reserves from 1982. The Australian dollar, more or less, fell into a 20 year downtrend against USD about then.

Wed, 12/15/2010 - 23:09 | Link to Comment eigenvalue
eigenvalue's picture

Gold and silver are hammered as usual in the access market. Why is Blythe Masters so obsessed with this sort of routine tactic? Why can't she conjure up some novel ones?

Wed, 12/15/2010 - 23:22 | Link to Comment edwardo1
edwardo1's picture

"Ironically, the only thing that can crash the price of gold, is if Bernanke, just like Volcker before him, does the right thing, and proceeds with the biggest tightening episode in recent US history. Everything else is some and spurious correlation."

This is, in my view, flatly wrong. It would crush the paper gold markets, but as soon as the U.S. economy was driven into the dust-with no mechanism to restore itself-there would be a run out of the dollar that would be as breathtaking as it would be terrifying. After all tax receipts would be vaporized by a Volcker like response to our present predicament, and what option would that leave the authorities? Two words: Unsterilized printing.

Thu, 12/16/2010 - 00:01 | Link to Comment ForWhomTheTollBuilds
ForWhomTheTollBuilds's picture

We often forget that things can change in fundamental ways and quickly.

 

When you say "Unsterilized printing", my gut reaction is "fat chance".  But in the circumstances you describe, the papers will be full of editorials about "ending the money shortage" so that people can afford to buy the basic necessities that are now beyond their means.  People will point at full grocery store shelves and announce that the only problem is that no one has the paper money they need to buy the food.

 

Zerohedge will run hilarious commentary on the consequences of ordering the stores to lower prices or of handing out stimulus cash at voting stations, but we will soon find ourselves being the butt of jokes on Mad Money once again.

 

Things that seem ridiculous and suicidal to us now, will be irresistable to the masses then.  It's kind of neat actually.

Wed, 12/15/2010 - 23:25 | Link to Comment ruffian
ruffian's picture

A disorderly stampede out of treasuries is not a reason to sell gold...only to buy it.  As rates rise the USA becomes progressively more insolvent with each BP increase which means even more T bond purchases and digital fiat credit creation to counteract it. In laymans terms the higher rates go the faster we go down the toilet...buy gold right here at $1380

Wed, 12/15/2010 - 23:53 | Link to Comment tony bonn
tony bonn's picture

if you are doing regression analysis on gdp, interest rates, and gold price since 1933 or 1971 you are a complete tard.

all of those series are so badly compromized, corrupt, and fake that such analysis is even more grossly inept.

this analysis is a disgrace.

one specific example which jim willie points out in his latest posting is that the bls replaced housing in the cpi calculations with a rent equivalent which vastly suppressed inflation. that in turn vastly overstates gdp growth.

i will state nothing about gold price suppression....this analysis deserves a gigantic toilet flush....

Thu, 12/16/2010 - 00:57 | Link to Comment UncleFurker
UncleFurker's picture

 

+1

GIGO

Garbage In : Garbage Out

 

Wed, 12/15/2010 - 23:58 | Link to Comment jbowman
Thu, 12/16/2010 - 00:09 | Link to Comment dark pools of soros
dark pools of soros's picture

the only way to kill the price of gold would be to totally legalize weed in the US.. everyone would self medicate and ignore health care, have fun with old gadgets instead of being stressed out for new toys, and just basically change the whole economy

 

if it was legalized, the whole rat race goes to the shitter since the few that don't toke all day won't have to fight to keep their jobs... so much less demand and stress for everyone involved

not saying that would be a great situation.. but the only one that could drop the price in gold

Thu, 12/16/2010 - 00:42 | Link to Comment indio007
indio007's picture

It would most certainly make the price of Yuba Gold go down.

Thu, 12/16/2010 - 01:01 | Link to Comment bankrupt JPM bu...
bankrupt JPM buy silver's picture

Americans are defaulting 1 foreclosure every 2 mintues in FL, and thats at 0%, can you imagine 5+% overnight?  HAHAH, thats actually funny to think about.

Thu, 12/16/2010 - 01:08 | Link to Comment Gunther
Gunther's picture

If anything, gold should correlate with real interest rates; like interest minus inflation.
The claim that there is and has never been a correlation between the price of gold and interest rates is wrong; between 1987 and 2000 there is a correlation between 10 year bond rates ant the POG. Divide POG by 50 and chart it-obvious.

Thu, 12/16/2010 - 01:17 | Link to Comment anarchitect
anarchitect's picture

Gold does well when real interest rates (nominal rates minus inflation) are low or, as is currently the case, negative. This is practically self-evident because gold has to look good when holding currency is a losing proposition.

The headline interest rate means little. In the late 70s, inflation was high and gold ran up. Volcker's tightening (=raising rates) killed the gold bubble because real rates went positive, even though inflation persisted for a while.

Forget your article on the probability of Bernanke tightening. The odds are epsilon, as doing so would totally devastate the budget by diverting a sizeable portion of it to paying interest on the debt. It would make it impossible to keep on delivering bread, circuses, and munitions.

The raw 10-year number is irrelevant, and it is fair for you to criticize it. But amid your vituperation, the big picture about real rates could have been stated far more clearly.

Thu, 12/16/2010 - 01:24 | Link to Comment trav7777
trav7777's picture

a rise in rates will not crush gold.

The rise in rates last time was the Fed *following* the market, not leading it.  The secular decline in rates was not caused by the Fed, rather a resumption of growth in the dollar sector.

Bonds' prices are basically fixed by SOLVENCY.  If we can resume growth, we can support the ponzi.  If not, it must collapse.  If the bonds cannot be repaid, their prices will fall.  The issue is really much simpler than people make it out to be.  The US is bankrupt as are all states with present levels of debt expected to be paid by future growth which will not come.

They can raise rates to eleventy billion and it won't make the US grow or make present debts payable.

Thu, 12/16/2010 - 01:54 | Link to Comment dark pools of soros
dark pools of soros's picture

but to get any of the growth going, the ones that are sitting on piles of cash need to see the reckless bailouts stop and insane gov spending die..  without defaults there doesn't look like a safe entry point for any of this needed growth to start

Thu, 12/16/2010 - 05:31 | Link to Comment kroegman
kroegman's picture

@anarchitect: indeed, and I recall that ZH features an article some time ago (couple of weeks) supporting the thesis that gold inversely relates to real interest rates. Nominal rates are indeed quite irrelevant in the discussion, so I am bit surprised to read this article now on ZH.

now long term nominal rates are increasing without gold going down, which shows that current nominal rate increase is probably more linked to increasing inflation expectations than economic uptrends (as the punditry would wish us to believe)

Thu, 12/16/2010 - 07:52 | Link to Comment TheDuke
TheDuke's picture

Positive real interest rates = bad for gold price.

Negative real interest rates = good for gold price.

Nominal interest rates are not worth getting your knickers in a knot over.

 

 

Thu, 12/16/2010 - 08:07 | Link to Comment Instant Karma
Instant Karma's picture

Well tightening for the Greenspan/Benanke crowd is 5%.

When is the last time Japan had rates at 5%?

Thu, 12/16/2010 - 10:35 | Link to Comment Zero Debt
Zero Debt's picture

I think it depends on why rates go up..

If they go up because of more debt issuance...or less bidders....

If the borrower ain't paying back anyway, what does it matter if rates are 5% or 50%?

 

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