Thursday, July 14, 2016

Gold going higher because of negative real rates

US Global Investors site:


Joining UBS in forecasting further gains is Credit Suisse, which sees gold reaching $1,500 by as early as the start of next year. As Kitco reports, Credit Suisse analyst Michael Slifirski writes that “the surprise Brexit vote has solidified and intensified macro and political uncertainty and extended the time frame for a negative real rate environment in the U.S. and potentially abroad.”

This is precisely what I told BNN’s Paul Bagnell this week, using Canada as an example. The Canadian 10-year yield is sitting just below 1 percent, while inflation in May came in at 1.5 percent. When we subtract the latter from the former, we get a real rate of negative 0.5 percent—meaning inflation is eating your lunch. Like negative bond yields, negative real rates have in the past accelerated momentum in gold’s Fear Trade.

We need only look at the end of the last upcycle in gold to see this to be the case. When gold hit its all-time high of $1,900 in August 2011, real interest rates were around 3 percent. A five-year Treasury bond yielded only 0.9 percent, and that’s before inflation took 3.8 percent. But as real rates rose, gold prices fell. Now the reverse is happening.

Real Rates are the primary driver of the gold price

As the article notes and I have pointed out repeatedly, the western governments and Japan are constrained by their huge debt loads and unfunded liabilities. In order to keep the game going they will have to resort to all types of financial machinations. This will include lower interest rates and eventually negative rates, higher doses of QE and eventually helicopter money. 

Mind you none of these things will work but will they will continue to undermine the value of the currencies of the countries that try these schemes. People are not stupid so expect them to do thing s to protect their wealth. You are currently seeing record highs in the stock market even thought the economy does not seem to support such enthusiasm. These recent highs are a result of all the currency units these countries are creating. The money has to go somewhere as current rates from government securities pay nothing and putting the money in the bank is a losing proposition.

.However this will eventually create an even bigger bubble than we have seen so far. I also expect to see more knowledgeable investors and speculator move into precious metals. The physical precious metals market and the market capitalization of the gold mining stocks is tiny compared to the amount of money created by central banks. If and when the herd breaks and tries to get into gold all at once it will be equivalent to trying to force the contents of the Hoover Dam through a garden hose.

I expect all time highs in the gold price and i also expect a mania in gold mining stocks. 

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