There is something interesting going on in the world of interest rates that is bullish in the medium term for the prices of gold and silver measured in dollars. This phenomenon only lasted a few months over the past 70 years, but it portended significantly higher metal prices in the years to come in each period. The recent price-crushing trades over the past week only provide the cautious gold investor with a better entry point into what promises to be a wise long-term opportunity. Everywhere gold goes, silver is destined to go too – sometimes sooner, sometimes later, but the long-term direction for these two metals is significantly higher. Today we’ll take a look at how high it is historically and how that correlates going forward, in light of current financial conditions.
One of the most important interest rates to watch is the yield on 10-year US Treasuries. Changes in this metric can tell us a lot about what’s on the economic horizon and it is one of the most watched metrics analyzed by professional investors today. This recent Forbes article will provide those interested in more general information on the 10-year Treasury, although I do not share the author’s view on the wisdom of investing in it at current yields. On Friday, the return was 1.5%, with the CPI currently reading 5%. The CPI is a commonly used measure of the rate of inflation. A CPI of 5% means that, in general, prices are increasing at a rate of 5% per year. Therefore, when prices increase by 5% and the government pays interest of 1.5% on a 10-year bond, it means that the real interest rate is (-) 3.5%.
8-fold increase in 5 years
In other words, your investment in 10-year US Treasuries will be worth 3.5% less each year, assuming the inflation rate stays the same and doesn’t increase further. We have reached the point of having negative real interest rates again here in the United States. As you can see from the graph, there have only been two other periods in the past 70 years where real rates have been this negative, after periods of negative interest rates of 3.5% or more. . Between 1974 and 1980, gold fell from a low of $ 130 in October 1975 to $ 912 in January 1980. There was a brief period in 1976 when interest rates turned positive and gold fell. dropped to $ 100, a 23% reduction from October 1975, before climbing higher. We might see slightly lower gold prices over the next few months, but not much lower.
Part of the right strategy for precious metals is to establish a position while possible and wait for good things to come together. In the meantime, it doesn’t matter if gold goes up or down by around $ 150 when medium term conditions are ripe for an 8-fold increase. When the exponential rise occurs, you want to be positioned to benefit from it. Because no one knows what will trigger such a move or exactly when it will happen, the best we can sometimes do is look for patterns throughout history and identify likely trends. For example, some think that we haven’t seen the low point of negative interest rates, while others think that they will rise soon. As we will see, gold and silver prices should benefit in both cases.
Likely direction – Future interest rates
Rates are more likely to fall significantly into negative territory than a significant rate hike like in 1980. The 10-year Treasury rate was raised to 16% in 1980, from a negative net rate a few months earlier. This rapid rise in interest rates during the reign of Federal Reserve Chairman Paul Volcker is the main reason why gold stopped rising and started reversing from $ 912 in 1980 to $ 310 in June 1982. But debt levels are much higher today than they are. were in 1980. The government couldn’t afford to raise rates anywhere near that today. On top of that, conditions are more likely to develop, showing us that the returns are heading in the opposite direction, minus (-) 14-20%. There are several reasons why this is the case.
Financial analyst Luke Gromen on his website offers an excellent analysis of why real rates turned so negative after WWII and why we are likely to experience something similar (but more extreme) in the near future. While the percentage of debt we have in the United States is similar today after the pandemic to what it was after WWII, we no longer have the manufacturing base we had then. After World War II, we were the factory of the world. But we’ve deindustrialised over the past 30 to 40 years, as factories closed here in the United States and opened overseas. This puts us in a position similar to that of France, Italy or Japan after WWII, which experienced negative interest rates in the range of (-) 25-60% after the war. . Negative real interest rates allow governments to pay off what would otherwise be insurmountable debts.
Governments like higher gold prices when debt rises
The other way for governments to repay or deleverage massively is to revalue gold. When gold is on the balance sheet (as it is by increasing measure), a rise in the price of gold becomes the friend of governments and central banks around the world. The next implementation of Basel III International Banking Rules, combined with negative real interest rates that appear destined to fall, both point to significantly higher gold (and silver) prices over the next 3-5 years, even though they tend to fall. lower for a few months. The continued fall in the price of gold on paper allows central banks (and cautious individuals) to build a portfolio of physical metals before the next parabolic move.
8-fold increase – A starting point
An obvious question that comes to mind is why did we discuss the 8-fold increase in gold between 1975 and 1980, but not what happened to gold after the (-) 14% d rate. real interest observed directly after WWII? Students of gold history may recall that gold remained in a range of $ 35-42 and could not float freely until after the Shock Nixon from 1971. Think about what can happen when we see similar negative returns in the near future, with a floating gold price less hampered by central bank manipulation. In this environment, an 8-fold increase in the price of gold would probably only be the start of the rally.