Guest Post: Gold's Critical Metric

Tyler Durden's picture

Submitted by Jeff Clarke of Casey Research

Gold's Critical Metric

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.

(Click on image to enlarge)

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.

(Click on image to enlarge)

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%.

(Click on image to enlarge)

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

(Click on image to enlarge)

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.

(Click on image to enlarge)

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.

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slewie the pi-rat's picture

how much longer will anything last?  L0L!

SilverIsKing's picture

When the US Dollar becomes a long term buy, that's when to consider selling some gold.  That would be........never.

flacon's picture

Here's good half hour video for you to think about:


Simplicity: Part 1


Simplicity: Part 2

CrazyCooter's picture

JFC ... "Gold's Critical Metric" ... seriously?

I got gold's metric right here ... let me spell it for you in cheerleader speak Z .. E .. R .. O.

That is where fiat is going. Divide by that, and you got a pro-tip on the future of gold prices.

Unfortunately, there isn't much else to know. The elite/1%/etc will incarcerate/jail/abuse/torture/nuke/etc the truth (i.e. people) in the process of trying to save themselves, but in the immortal words of Richard Feynman ...

"For a successful technology, reality must take precedence over public relations, for nature cannot be fooled."

Guy was a fucking genius. I reccomend his book "Surely You're Joking, Mr. Feynman!". It is ideal for young teen males who like pranks, thinking, and generally being obstinate; ideal qualities of a free thinking contributors to WEALTH.

I need to stop ranting, I had a few beers ... fsck, I burned my salmon ...



AldousHuxley's picture

no matter how powerful corrupt banksters, politicians, central banksters are in pushing fiat money, natural fiat kryptonite of gold will be there to keep it in check.


Pinto Currency's picture



This Casey Research piece is interesting - too bad it is disconnected from reality.

When you have the reporting of consumer goods price inflation (CPI) fraudulently understated by 8% ( don't like that number? choose another.  Okay let's call it 6%) then this type of analysis, uncorrected, is meaningless and even deceptive.

In reality, the real interest rate is in the neighborhood of -5% indicating how broken the economy is after decades of distructive intervention by the central planners in the Fed, Treasury, and the bullion banks and the gold price that we are given every day is a play number for retail investors. 

CrazyCooter is right on point.

bernorange's picture

Your comment implies that using John Williams' numbers invalidate the thesis.  But using a higher inflation number only shifts the Y axis on the graph.  The central premise remains. 

Pinto Currency's picture


It is well known that gold increases in price when the real rate of interest becomes negative. 

However, the real interest rate proxy (30 year bond - real consumer goods inflation rate) have been negative since the mid 1990s due to intervention in the bond markets while the BLS produced increasingly false CPI figures.

At this same time, there was heavy intervention in the gold market as well.  The "great moderation" was a fraud.

For a true view of what has happened with real rates and gold see Reg Howe's piece Gibson's Paradox and Rising Rates:

The Casey piece gives graphs noting that gold falters when real interest rates are higher than inflation (What!?) and gold benefits when real interest rates fall below 2%?  This is bunk and looking at rigged inflation numbers and rigged gold prices don't tell you much. 

The price of gold was increasingly heavily rigged starting in the 1990s and it remains less effectively rigged today while real rates are less than -5%.  Congrats to Mssrs. Rubin & Summers.

surfersd's picture

I have been a long term gold bull, but what if ....... The US is able to turn around its trade deficit by becoming a net exporter or very smaller importer of oil. In the last four years net imports of crude and petroleum products has gone from 13.2 mmbd to 8.1 mmbd. 

Withthe increase in the Bakken a possible Romney win, could we see some physical discipline and a major league improvement in the trade deficit leading to a stonger dollar.

Realize that higher rates will hurt the FED's balance sheet, but is it possible for the US to be natural resource country?

Tyler any thoughts?



xtop23's picture

I dont pretend to be Tyler(s) but I would just say this,

Fiat currencies have a life cycle of approximately 40 years. They always go to zero.

If rates rise we can't service our debt. Period.

America doesn't have the tax base to support the current spending levels regardless of what the Dems proclaim with their class warfare schtick.

Americans are levered to the hilt.

A Romney election will increase military spending which is already inordinately expensive and unsustainable without increased deficit spending.

Even the Ryan budget plan, which has zero chance of passing, uses extremely optimistic computing to "balance" the budget in 20+ years. 

America's manufacturing base is gutted.

BRIC countries as well as others around the world are actively pursuing non-dollar denominated trade.

For the US to become a net exporter the american public would have to have a drastic decrease in living standard to be competitive.


Not going to happen. At some point we'll boil over and it's game on.

Bernanke will continue to print and I think at some point overt QE will be unavoidable (regardless of what Graham Summers says :p / probably set to occur after this election cycle), and Gold / Silver are going to respond.

Pinto Currency's picture

Gold and silver are going to respond?

Every day the clowns from the Fed/Treasury/bullion banks climb inside the reactor and turn some screws and say they've made the adjustments necessary. 

The gold price is a fiction for mass consumption and the reactor has a serious, serious wobble that is getting worse.

TDoS's picture

This decrease in imports is primarily due to demand destruction caused by the recession.  The Bakken is shale, and these shale wells have production drop offs of 90% after two/three years of operation.  Most shale wells that are over two years old pump a paltry 80 barrels per day.

The US will not be a net exporter of oil any time soon.  Only if the country is impoverished and domestic demand is completely, fat chance. 

TeMpTeK's picture

Gold is a barbarous relic.... Silver Bitchez!


vast-dom's picture

" 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. " But today we find ourselves in the exact opposite alter-world as the fed defies all market convention and both institutes zirp and buys up junk usa bonds.

non_anon's picture

WTF?! Gold has been on a tear since 2008, beginnging of the end, keep your powder dry!

MFL8240's picture

The bullshit will last forever!  Thats the problem, nothing is real.

dolph9's picture

Gold is a long term buy for as far as the eye can see, people.

If the economy continues in zombie negative interest mode, you win big.

If the money collapses, you preserve your wealth.

I simply don't see how you lose in gold apart from theft or confiscation, which is very difficult for the powers that be, despite their seeming invincibility.


Unless the play is to quit your job and spend all your money(including gold) before the SHTF.  But yeah, hardly seems like one could lose with AU, or AG.  

flacon's picture

I agree, suicide is always an option (quit your job and spend all your money).

Think for yourself's picture

Well, in mid 2010 I decided to say fuck it all to hell, quit my job, flew to south america and spent all my money "travelling" (mostly partying). Not quite suicide but close enough.

However, after going 100% broke in mid-2011 with no one to depend on, deciding to bootstrap myself back up from scratch, I'm now back on my feet with maybe approx 2.5k net worth, currently aiming to get enough both to start my first small business and to slowly place aside something that could eventually provide for a family.

Not a bad recovery for an ex-lazy ass. Best character-building experience I could ever have afforded, hell, I'm sure that many people fork over fistfuls of gold for seminars that won't bring them 1% of what I lived in the last 2 years.

malikai's picture

You are the 1%. The 1% that has awoken to life.

Congrats mate. It is a great place to be.

Moe Howard's picture

Did basically the same thing, WW, for about 5 years back in the early eighties. I would say, yeah, you are "woke up" and things will never be the same. I often wonder if it is because you [and I] removed yourself from the "culture". I personally just don't see things the same way as 98% of those around me.

Think for yourself's picture

I agree that things will never be the same; however I don't believe that it's anything special (which you do not imply) but rather the fact that I was already mostly detached from the culture I grew up in that facilitated so much my dropping of it.
[For the record, I grew up in rural french canada, notoriously conservative if not protectionist of its culture, while being a geek myself and being immersed in computers (I've always had one as far as I remember) and getting internet as soon as it became available - I was 10 y/o. Hence I've always seen myself as a member of the species more than a member of a culture]

I think that I speak for many of those about a quarter-century old or younger, although they might not know to say it, that we grow up alienated to the host culture that surrounds us. Most realize (or feel, at a deep down level) that it is merely empty posturing, as we have grown up in an environment where we can more easily see cultures meaninglessly preening at each other.

I guess that most people choose to continue to identify with those cultures because it would be too scary to drop it off, after all it is often the only reference that gives meaning to their lives. That becomes much easier to do once you realize that the meaning it gives you is fundamentally empty, or even misleading, or when you just want to get out of the shitfest we've been digging ourselves in.

smiler03's picture

I'm really glad you enjoyed yourself and I did the same. I recommend you do it at least twice more before you're forty ;O)

Having two years off by your mid twenties though is hardly unusual, well not in my circle of friends. This ZH crowd however put everything they've got into gold and who mostly say they will never sell it. I seriously wonder how many of them have ever really lived.

edit: You are splendidly eloquent :O)

edit #2: The average Australian 25 year old would consider you a weirdo if you have HAVEN'T had a lengthy period of foreign travel.

akak's picture

edit #2: The average Australian 25 year old would consider you a weirdo if you have HAVEN'T had a lengthy period of foreign travel.

Definitely a mark in favor of the average Australian 25 year-old vs. his (provincial?  geographically ignorant?  arrogant?) American counterpart.

Now, if only we could teach him to speak real English .....

Gunga's picture

Real interesting, thank you for this . It is easy to forget the basics when caught up in all of the noise

DoChenRollingBearing's picture

A friend of mine is a realtor.  He has recently noted both prices and unit sales of houses going up, in an area that has been very depressed since 2007.

He thinks this is a sign of upcoming inflation...

Disclosure: my friend and I both own gold.

kridkrid's picture

Can I ask a question (of anyone)... how big of a difference is there when you are purchasing physical gold or silver based on where you buy?  It's all some amount around spot with some premium if what you are buying is considered a collectable of some sort or another.  Say I were in the market to buy 10oz of gold and something like 700oz of silver what would people recommend?  Not for me, of course... for my unlucky friend who always seems to lose this stuff in weird boating accidents.

Likstane's picture

Go to APMEX or Provident metals or Bullion Direct and pick up a bunch of generic silver rounds and 40 British sovereigns or French 20 francs.  Lower vig than the U S eagles(ag or au).  Silver is silver and gold is gold; besides the old european gold coins are the coolest.  Those are the dealers I used before the accident in the surf. 

traderjoe's picture

Apmex is credible but expensive. And they clear through JPM.

I'd much rather buy local, so you can sell for cash if needed.

Canadian Maples or junk silver are much better for silver than generic rounds. For gold, go with Australian coins, lower premiums and nice plastic cases.

Born-Again Bankster's picture

I get silver eagles for $2 over spot 24/7.  You guys do better anywhere?

Missiondweller's picture

I would buy local if it were not for sales tax in CA.

Fred C Dobbs's picture

There is no sales tax on gold in California.  Same for silver I believe.  

Diablo's picture

for large orders it pays to check out tulving first. they usually have the best prices for big orders. 


lasvegaspersona's picture

Tulving yes!

minimum order size 10 oz though for most coins/bullion it is 20 oz. 

My rec is gold only, I have some silver but I have become  FOFOAistic in my thinking. Of course he could be wrong but then I wind up with all PMs anyway. If he is correct my remaining silver appreciates at commodity rates only. Gold gets special treatment as the big guys incorporate it into the wealth asset.

passwordis's picture

I discovered many years ago. In business for decades.. they are brokers. You agree to buy a set amount and they issue you a trade number and they place the order. You pay by bank transfer or money order. They have minimums.  I think they charge an additional $25 on orders less than 500 ounces of silver..


 The quotes you see at the website include shipping. Even with the small order charge they are the least expensive I've found in the last 5 years..  I'll make a friendly bet with anyone here that they can't find cheaper silver and gold.  I've also been able to get great prices from a local dealer... a big wad of cash makes the difference.   Coloradogold is cheaper and I used to buy from them but I'm willing to pay a little more locally.  It's much easier and less stressful to pay cash and walk out with some heavy metal in your pockets  compared to going to my bank and spending 20 minutes setting up a transfer.. and waiting to make sure it went through.. and getting the confirmation email and then waiting a week or more for your stuff.

If I did'nt have a great local dealer I would be buying from The price for silver right now is $34.34 delivered for 200 ounces ... current spot is $32.67.. That's 1.67 over spot delivered.. I don't think you will beat that price anywhere.. at least not from a dealer.


Vint Slugs's picture

Your points are well made, especially w/ respect to buying locally w/ cash.  A negative to consider in addition to the inconvenience of a bank wire transfer is that there's a permanent record of your transaction - plus you can bet that the bank will file a SAR about you. 

But why are you buying silver instead of gold?  No response necessary, but everyone should realize that you're not buying price you're buying ounces.  Once you realize that then there's little reason to buy silver.

passwordis's picture

plus you can bet that the bank will file a SAR about you.


 I believe a SAR would only be required if the transaction is in cash and not a digital transaction.


But why are you buying silver instead of gold?  No response necessary, but everyone should realize that you're not buying price you're buying ounces.  Once you realize that then there's little reason to buy silver.


  It's late and perhaps it's me but I have no idea what you just said.  I stay away from Gold because I think it's more likely to come under capital controls. I like silver because, as I look back 10 years, if I bought gold instead.. I would have much less buying power today.. assuming I liquidated.

slewie the pi-rat's picture

@ krid_crud: 

it's hard to believe anybody could be this fuking styooopid after being here for almost two years!

"can i ask a question...?"    the answer is: you are a shitheaded moronic asswipe!

not to mention another of the "innocent tulvigTrolls"

tulvig makes me sick, BiCheZ! 

Vint Slugs's picture


What's your beef with Tulving?  Have you bot 20 oz or more gold bullion from a competitor at a better delivered time/price?  I've dealt with Kitco, for example and had them split an order w/out informing me so that I thought they had stiffed me for a key.  Also the delivery time delay was insufferable.

slewie the pi-rat's picture

just exactly what i said my beef was, toy-boy

read it again, since you don't understand what i already wrote about the games tulvig  plays here

>>>how tf can a guy who's been a zeroHead for almost two fuking years pen that post?

when they have zeroHeads who have been here 1-2 years and are regular readers and bloggers pretend they don't know the first thing about buying a few 'ounces of gold' and maybe a 'bunch of silver',  time and again, here,

they make me fuking PUKE!

but perhaps most people aren't blessed with being able to stay around the site as much as slewie;  they wouldn't notice;  i'm trying to tell them and you and anyone:  i notice!

this is the third time in about a month that i have clicked on one of these "innocent nooby gold and silver 'questions'" zH name to see a regular blogger of well over a year;  the other two times are already down, bro

and then i am always politely and innocently questioned and interrogated to please explain myself to these fuking asswipe tulvigTrolls!  always!

Likstane's picture

Damn pi-rat, I didn't know I was supposed to check on said trollers length of service before I offered advice on one of the few things I am familiar with here.  Maybe I'll check with you next time...on second thought...nah...piss off bitch stain.

slewie the pi-rat's picture

well, maybe they'll stop now, b/c this is the third time i've taken the time and energy to call out their "let'sPretend" troll-spamming, here

they take up entire pages!

again, i have documented here, now, three times a zH with 1-2 years of pay-attention-type blogging pretending not to know a g-damned about how to buy a fuking coin!  or roll or a box

the thing is, tyler knows what i have put up here, all 3 times, and others know one or two

tyler is a publisher who owns this website

i've now made three distict cases w/ the same "innocent&polite" M0 on tyler's website

these asswipes are pretending things here to get tulvig's sales pitch and testimonials publisher here

don't blame me;  i'm only pointing out what these salespeople are doing to and on tyler's website

if you want to pretend they're not doing this, too, wtf do i care? 

i can't be any clearer than i've laid out here, 3X now

if it stops, great, if it happens again, i might notice the re-runs...

you're being set-up;  tyler and i are laughing our asses off that you think this troll actually wants your "advice" 

you're a fuking idiot! 

i checked  "said trollers length of service" b/c i know what they're doing and how

is it slewie's fault you got caught out by the tulvigTrolls? 

go back to fukFace if you're too infantile to click to see to whom you're responding

i didn't have anybody to tell me, and it took me a year to see it...

you are projecting a "stain" on me? 

why doncha tell us more about it? 

Vint Slugs's picture


Before we get to answering your question, answer this:  why would your "friend" buy 1.35 times more silver than gold?  Unless his ultimate scenario is a complete economic collapse that results in barter transactions, it's hard to justify overweighting with silver.

Now, when your friend buys precious metals, those are considered capital assets that are defined by the IRS as "collectibles" (regardless if he buys bullion or bullion coins - not numismatic coins).  Therefore, if he sells those holdings (assuming that the totalitarian state has not confiscated them), instead of bartering them, he will incur an initial 28% tax penalty (loss on the appreciation).  Plus, of course, there are ancillary losses such as the purchase premium and the sale discount; also the cost of storage (in a private vault and not in a commerical bank "safety deposit" box; and also the likelihood that he could not move them in his possession via public transport without risking their confiscation.

As regards PM dealers, as others here have noted Tulving is a reputable dealer whose buy/sell spreads are tight.  He will buy as well as sell and he covers shipping/insurance costs on product shipped to him.  He delivers overnight which larger dealers such as Kitco cannot come close to doing.

akak's picture

That 28% capital gains penalty on precious metals is NOT absolute --- it only pertains to those who are already in or above the 28% general income tax rate bracket.  For those below that level, gains on gold and/or silver are currently only taxed at that individual's prevailing income tax rate.

This bit of misinformation about US capital gains taxes on PMs ALWAYS being at 28% is widely repeated and almost ubiquitously believed, but I assure you it is incorrect.
I suspect it is the inadvertent result of advice and information regarding gold and silver usually being written by fairly wealthy individuals who do not stop to consider that not all of their readers as are wealthy as they are, or perhaps not wealthy at all.

Vint Slugs's picture

Thanks for that clarification.  Maybe to the benefit of all here you could link us to that part of the US Tax Code that specifies "already in or above the 28% gen'l income tax rate bracket".

Likstane's picture

Why would anyone pay any tax on any gold or silver coins or bars?