Gold the Once and Future Currency - Rickards

JulieW · Oct 15, 2015

http://www.dailyreckoning.com.au/is-this-the-bottom-for-gold/2015/10/15/

Our estimate is that gold has now found a bottom and is poised to move steadily upward from current levels.

For those who are fully allocated in physical gold (I recommend about 10% of investible assets), there's nothing more to do on that front. You can just sit tight and enjoy the ride.

For those who do not have the recommended allocation to physical gold, this is an attractive entry point and a chance to top up your allocation at the best prices in six years.
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and;

Real interest rates are one of the best predictors of the nominal dollar price of gold. When real interest rates are low (or negative), that gives gold a boost. When real interest rates are high, that puts downward pressure on gold.

The correlation is not perfect, but it's much stronger than other correlations such as the stock market or economic growth. The reason for the correlation is easy to understand. Gold has no yield. Gold's valuation has to compete with other asset classes such as stocks and bonds that do have yields. When yields on competing asset classes are higher, the gold price tends to suffer, and vice versa.

What matters for this purpose is not the nominal rate of interest but the real rate. Real interest rates are defined as the nominal interest rate minus inflation. For example, if the nominal interest rate is 5%, but inflation is 3%, then the real rate is only 2% (5% minus 3%). That sounds simple enough, but there are complications.

In selecting nominal interest rates, you have to specify a maturity. Rates on 2-year Treasury notes are much lower than rates on 10-year Treasury notes. We use the 10-year note rate for our analyses because it's a good proxy for mortgage rates and corporate bond rates, which represent the cost of financing long-term investments in housing and fixed assets by individuals and corporations. It makes more sense to think about gold as a long-term core holding than as a short-term trading instrument.

The other complication arises when the rate of inflation is greater than the nominal rate of interest. In that case, the real rate is negative. This could happen when the 10-year note rate is 1% and inflation is 2%.

In that case, the real rate is negative 1% (1% minus 2%). That is the ideal environment for gold. A zero yield on gold is actually greater than the negative real yield on notes.

Wall Street analysts keep talking about how low interest rates are. It's true that nominal rates are low, but real rates are quite high by historic standards. For the past several years, 10-year nominal rates have mostly been over 2%, but inflation has been about 1%, sometimes lower.

This means that the real rate on 10-year notes has been over 1%. Compare this to the situation in 1980 (when gold hit a new high of $800 per ounce). Back then, Treasury bonds yielded 13%, but inflation was 15%, so the real rate was negative 2%. Don't be misled by low nominal interest rates. Focus on the real rates instead and you'll have better insight into the future price of gold.
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In summary:

The CBGA was created in 1999 and renewed in 2004 and 2009. The largest seller under CBGA was Switzerland. This agreement has now failed, and there have been no sales by any of the signatories since 2010.

Since then, central banks have moved from being net sellers to net buyers for the first time in decades. With few official sellers and many official and nonofficial buyers, gold demand now exceeds gold supply from mines, putting pressure on scrap gold and other weak hands to fill the gap.

The importance of this analysis is that it doesn't focus on where we are. It focuses on where we're going. Central banks cannot tolerate high real interest rates, because they burden consumption and investment.

The Federal Reserve cannot tolerate a strong dollar because it imports deflation (in the form of lower import prices) from around the world. Physical markets are skewed toward excess demand because China, Russia, Iran and other countries continue to demand gold to diversify reserves away from dollars while output is flat and official sales by the West have ceased.

All three factors real rates, the strong dollar and official sales are pointing toward a reversal of recent trends and momentum toward conditions that favour higher gold prices.

Gold can move in either direction, but it is much more likely to move up than down given current conditions.
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grinners · Oct 26, 2015

In that case, the real rate is negative 1% (1% minus 2%). That is the ideal environment for gold. A zero yield on gold is actually greater than the negative real yield on notes.
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This seems like an error of thinking to me.

If the real yield on the 10-year note is negative 1% (1% minus 2% inflation), then the zero yield on gold is actually negative 2% (0% minus 2% inflation).

Porcello · Oct 26, 2015

grinners said:

In that case, the real rate is negative 1% (1% minus 2%). That is the ideal environment for gold. A zero yield on gold is actually greater than the negative real yield on notes.
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This seems like an error of thinking to me.

If the real yield on the 10-year note is negative 1% (1% minus 2% inflation), then the zero yield on gold is actually negative 2% (0% minus 2% inflation).
Click to expand...

I guess the idea is that because inflation is 2% this is more or less how much gold will appreciate in terms of dollars, which is double than the yield of a 10year note.

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Gold the Once and Future Currency - Rickards

JulieW Well-Known Member Silver Stacker

grinners Active Member Silver Stacker

Porcello New Member

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Gold the Once and Future Currency - Rickards

JulieW Well-Known Member Silver Stacker

grinners Active Member Silver Stacker

Porcello New Member

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