This page has been archived and commenting is disabled.
Guest Post: Gold's Critical Metric
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:
- 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.
- Don't get flummoxed when you hear talk about rising rates. Watch the real rate instead.
- 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.
- 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.
»
- 21377 reads
- Printer-friendly version
- Send to friend
- advertisements -
He said hard, I like it. Duro oro.
I'm beginning to consider the possibility that the money power is being underestimated. The dollar is going to crash when they want it to but what happens if they don't want it to for another 10 or 20 years?.. People who think the US government is broke are wrong. The US Government is not broke.. The US government (and local and state) own over half of all the real estate, pension funds, insurance companies, liquid investment funds, bond financing accounts and corporate stock in America and a good chunk of internationals as well.
The next time you hear references to the national budget realize that the budget is just a slice of the pie. We are lead to believe that the "budget" contains all revenues and expenditures. This is not the case. The government is far wealthier than we have been lead to believe.
I'm buying metal by default. I'm taking a chance. I've been doing it for almost ten years... so far so good but I no longer base my decisions on things like interest rates or supply and demand or JPM's massive short position or a dollar crash or QE3 or comments by Jim Sinclair and James Turk. It's a world of make-believe... I have no idea what's real. I'm just crossing my fingers these days and I hope and pray that I pick the right time to trade my stuff for other stuff .
Amen brother. Sometimes all we can do is hope and pray. But realize that God knows who has worshiped at the altar of gold. God will show you the way, but his way is to teach through experience and sometimes through suffering.
dafuq did i just read?
That is Sandoz .. Perpetual anti-Gold paperbug and general troll of all trades.
Just tosses in generic anti-PM posts and gets paid for it!
Can't blame the guy, everyone has to put food on the table.
Sandoz-- Protecting the sheeple from going long gold since 2002.
I truly feel sorry for you if you think I'm actually getting paid to critcize the ZH echo chamber. Have you ever looked around at the posts here? This place is one big groupthink. I'm just trying introduce some critical thinking so people don't fall victim to this stuff. 80% of the people who post here are like zombies repeating the same words over and over.
I feel the need to correct you. 99% of the people here are like zombies, repeating the words....
Must buy Gold
Must buy more Gold
Must sell everything, buy Gold
Must make joke about boating accident and gold
Must ignore Gold price drop
Must buy Gold tinted spectacles
Must think Gold will be $2500 by year end 2011
Must think Gold buys more loaves of bread than atoms in the Universe
Must not diss Gold
Must never acknowledge that Gold once didn't rise in price for 27 years
Must only ever buy physical
Must hate bastards like smiler03 who make money from Gold ETFs
Must downvote anybody who doesn't think Gold is the answer to the End of the World coming to you very soon
Smiler03 can't buy physical because the UK SIPP won't allow it and has little cash, he must be an idiot for not buying physical
Smiler03 must be poor so shouldn't comment about Gold
Must marry Sandoz
Oh shit, now I'm getting irrational!
When it comes to the topic of gold --- a topic which you obviously loathe and of which you are clearly quite ignorant, like most of the brainwashed masses --- your posts are really quite pointless and useless.
If you are going to troll, at least do it with some intelligence and levity.
I couldn't resist this, the perenially useful Urban Dictionary to my rescue:
"Prole"
As in other definitions, used to describe a person deemed of a lower, more worthless social rank. Created by George Orwell in his book "Nineteen Eighty-Four", to describe the lower insignificant classes of the fantastical British state. "The proles are out on the streets causing trouble again." http://www.urbandictionary.com/define.php?term=prole No offence intended, I promise
Ben, is that you?
The right time to trade your stuff for other stuff is when a country issues a new gold backed currency. Priced in your new money things and property will be dirt cheap for you.
There was a shift in the demand curve for gold in 1980 because of the Hunt brothers effort to corner the Silver market. Had Gold buyers joined the Hunt Brothers effort at that time by buying Silver then we wouldn't be in this mess that we are in today. Gold buyers were just as stodgy back then as they are today.
Me no understand. Where does money go when UST = Stocks + Commodities and the Fed stops QE?Im thinking UST = buyers + FED and when UST = just buyers that would mean new UST = Stocks + Commodities - FED. I know the Fed wont start selling anytime soon but any hint that they will would have front runners front running each other that it will become true, just like operation twist. How much is 2 trillions dollars out of the US stock and commodities market?
I hold gold and silver because I do not trust the fuckers. No charts, interest rates or analysing government bonds crap for me.
I don't trust them; they're after us. It's about trust..trust..trust.
Wake me up when gold is at 5000US$.
Exactly. This day by day bullshit is a waste of energy and time. Let me know when gold does a 3 to 4 hundred dollar dump so I can buy some and a 2 to 4 thousand dollar jump so I can take a look and see if I want to sell some.
Yes, my thoughts exactly.
Nice GIF!
Just patience, and wish to go long ->with enough reserves to withstand any drop to high 20-ties. For gold, as Turd says- enough reserves to withstand high 1500-ties.
Long term prediction Silver:
http://www.tfmetalsreport.com/comment/78025#comment-78025
Long term prediction Gold:
http://www.tfmetalsreport.com/comment/83978#comment-83978
On other hand, once You go long there (high 20-ties if they come, high 1500-ties if they come) , its one way traffic.
For EUR silver/gold the dip will not be much lower as it is today due to devaluation of EUR vs. USD in coming months.
Long term prediction EUR/USD:
http://www.tfmetalsreport.com/comment/146897#comment-146897
For stackers, below 32,5 is excellent opportunity to add ( not that it means much in a long run, but still nicer to buy close to the bottom).
And yes, the key is that manipulation exists, which shows despair , which will only continue until it will not be able to continue- no later than end of 2012, in my opinion. After the USA elections all hell will break loose in easing terms, whoever wins. Meanwhile, Europe, Japan, UK etc. will continue easing all the year long.
Nice to see you here again Ivars.
Black is beautiful, your fiat check is in the mail, I won't come in your mouth, my local Pakistani 7/11 clerk will not accept gold for a bag of Doritos ! The four great truths of Sandoz the Magnificent Monedas 2012 Sandoz is an empty mayonaise jar !
Short mayonaise jars!
will repost this comment about the hyperinflation of Silver in Weimar Germany after rechecking my figures...
I think he needs to rework those inflation assumptions.
I love how Casey Research paints a rosy picture concerning the gold bull market when the fact is that thanks to central bank intervention, the bull market was stopped dead in its tracks when gold hit $1925 an oz last year. If one was a latecomer to the market, say in 2011, one has actually LOST money buying gold due to this intervention. This is of course the point, is it not? To make precious metals such an unappealing purchase compared to stocks that no one will buy them? On this score, I'd say the central bankers have been extremely successful. None of this denies the reality that the underlying fundamentals supporting a bull market still exist, but until the price mechanism accurately reflects the VALUE of gold, this bull market is held in abeyance and calling it a bull market is, well, bull. Does this make gold a poor place to put money going forward? Absolutely not, given that stacking physical gives you an asset with zero counter-party risk and it provides insurance in the event of a global economic collapse. Keep in mind, however, that in today's global marketplace perception equals reality and the perception is that gold is declining in value and is not preferable to owning stocks. Those who have the stomach for buying an asset declining in value due to blatant manipulation and the herd mentality will continue to dollar cost average downward, but please, let's call the current situation what it is - a bullish set-up for future gains, not a bull market.
Too bad he uses fake inflation...
http://goldandsilverlinings.com/?p=1945
How many times do I have to tell you. Gold will trade back BELOW SPX before this deflation gets worked out of they system. Lets say SPX 900, GOLD 750 anf oil 65.
I am psychologivally prepared for gold 750. It would not surprise me at all to see gold heading back to the 1200 -- 800 area. Likewise silver to 18 then 12 .. then ??
It would not surprise me at all, however it would dissapoint me greatly and foil my plans.
I have no intention of selling, I have placed my bets now let the chips fall where they may.
/I mean that was before I lost everything in that sad spelunking venture gone bad
Blind Faith. It cannot be beaten.
Indeed.
Your every blind and irrational anti-gold post proves that, in spades.
In your proud ignorance of history, monetary history in particular, and in your arrogant and willful denial of the inevitable results of exponentially rising governmental debt as it relates to fiat currency debasement, you come across as .... well, positively American.