In Case You Missed It

Wednesday, February 1, 2012 at 9:39 pm

Lots of interesting stuff going on today. Our precious metals rallied and the open interest numbers continue to contract. However, the biggest story of the day flew under the radar.

You've probably heard it said that "gold performs best in an environment of negative real interest rates". You've probably then asked yourself: "Self, what the heck does that mean?". Well Turd The Answer Man is here to help.

Everyone knows what an interest rate is but what is a real interest rate? Simply put, it is your stated interest or coupon rate minus the rate of inflation. In a simple calculation, it looks like this:

5% (interest rate) - 3% (inflation rate) = 2% real interest rate

and

3% (interest rate) - 5% (inflation rate) = -2% real interest rate

The real rate should always be the investors primary focus. What good is a 10% bond if inflation is 20%? The only thing you're guaranteeing yourself is a 10% annual loss of purchasing power. That dog won't hunt.

Not coincidentally, managing real rates is the primary reason why the Fed manipulates the gold market through the bullion banks. Soaring gold would be a sure sign of present or future inflation. Expectations of significant inflation lessens investor demand for fixed interest rate securities like treasury bonds. Less demand equals lower prices. Lower prices equal higher rates and higher rates bring down The Great Ponzi. Similarly, managing real rates is also the reason why the Consumer Price Index is constantly being reworked to indicate a lower rate of inflation.

In understanding all of this, now ask yourself: "What is it that all of the AGAs always say is the primary drawback to owning gold?". Is it because it's a barbarous relic? Is it because it costs so much to deliver and safely store? Well, yes, the AGAs do point to these two arguments. However, the main argument that you always seem to hear the most is: GOLD DOESN'T PAY ANY INTEREST. Sure, the price of gold might keep up with inflation but, since it doesn't pay interest or a dividend, the gold holder is only securing for themselves a rate of return that might approximate the rate of inflation. Stated another way...gold investors only receive a 0% real interest rate.

So, there's your answer. From the traditionalist's point of view, gold suddenly has real value in an environment of negative real interest rates. Why? Because 0% is always better than -2% or -5%. It's as simple as that.

Now, lets' get back to the story today that might have evaded your attention:

http://www.zerohedge.com/news/supercommittee-runs-america-urges-end-zero-bound-demands-issuance-negative-yield-bonds

In summary, something called the Treasury Borrowing Advisory Committee (think of it as the primary Primary Dealers) is advising the Treasury Department to begin "allowing for negative yield auction results as soon as practically possible". In English this means: Build a platform whereby treasuries can be sold with a guaranteed negative rate of return. You give the U.S. government $1010 and they'll return to you $1000 at maturity, thank you very much. What a sweet deal! The U.S. government charges the investor 1% for the privilege of holding their money. (I guess we should just be thankful that this facility will be voluntary...for now.)

At any rate, let's go back and do some more real interest rate calculations. Shall we?

-1% (interest rate) - 3% (CPI inflation rate) = -4% real interest rate

and

-1% (interest rate) - 8% (ShadowStats inflation rate) = -9% real interest rate

So here's the point: As we move into an environment where we are institutionalizing extremely low and even negative interest rates, we are creating a permanent state of negative real rates. And, as the pundits say, "gold performs best in an environment of negative real interest rates".

So, buy the dips! The secular bull market in precious metals continues and will continue indefinitely.

Rock on, Wayne! Party on, Garth!

Login or register to post comments
14660 reads
Print
Email

Comments

No, I Didn't Miss Being

Submitted by Ferd Torgerson on February 1, 2012 - 9:41pm.

First

Turd, amazing that we don't see this kind of useful info anywhere except on your blog. This simple presentation, if more widely circulated, would go a long way toward opening the eyes of the masses.

I hope others here will share this with friends and family.

Thanks for all you do.

first again

Submitted by acer rubrum on February 1, 2012 - 9:42pm.

could it be that a newb is first again, 2 nites in a row?

edit- note to self... too slow

Capitalism isn't broken but the People that run it certainly are

Submitted by Be Prepared on February 1, 2012 - 9:47pm.

Third! haha

Submitted by stalking wolf on February 1, 2012 - 9:48pm.

Couldn't post on the last thread!

$1749.00 Gold

$33.85 Silver

Third! haha

Submitted by stalking wolf on February 1, 2012 - 9:48pm.

Couldn't post on the last thread!

$1749.00 Gold

$33.85 Silver

thurd (or 9th...)

Submitted by stubbornman on February 1, 2012 - 9:48pm.

Stack stack stack away!!!1

If wishes were horses...

Submitted by Magpie on February 1, 2012 - 9:53pm.

1864.41

35.94

My bad, but it was prior to six here.

AGA

Submitted by StevenBHorse on February 1, 2012 - 9:53pm.

Anti-gold Asshole ?

Contest closed at 6:00

Submitted by Turd Ferguson on February 1, 2012 - 9:53pm.

MODERATOR

Please. No more contest entries.

We'll have another one again soon.

I hope AGA = Anti Gold

Submitted by TheGoodDoctor on February 1, 2012 - 9:53pm.

I hope AGA = Anti Gold Assholes

implications

Submitted by Laurens1778 on February 1, 2012 - 9:54pm.

wow, thanks Turd. I saw the story earlier today but the implications didn't sink in.

That's why I read this site everyday!

You got it, Big Daddy

Submitted by Turd Ferguson on February 1, 2012 - 9:55pm.

MODERATOR

Decorum dictates that we can't include that definition in the "Turdisms" glossary.

Response to: I hope AGA = Anti Gold

Humm

Submitted by tyberious on February 1, 2012 - 9:55pm.

I'm not sure if I should jump for joy or cry in despair!

40 years and we have gone down the tubes faster than anyone would ever imagine!

What will the next 40 hold?

Will we look more like Russia or China or Argentina or Mississippi?

BTW,

Thanks Turd!

Exodus from the Eurozone Debt Crisis

Submitted by Be Prepared on February 1, 2012 - 9:56pm.

Exodus from the Eurozone Debt Crisis

By Wolf Richter, San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Cross posted from Testosterone Pit .

Unemployment is a staggering problem in Eurozone countries that are at the core of the debt crisis. Spain’s jobless rate jumped to 22.8%. Among 16 to 24-year-olds, it’s an unimaginable 51.4%, up from 18% in 2008 when Spain’s crisis began with the collapse of its housing bubble. In Greece, youth unemployment reached 46.6%. In Portugal, it’s 30.7%, in Italy 30.1%.

And optimism, that essential source of energy for the younger generation, has been replaced by pessimism. Gallup reported that 80% of the people in the EU had a negative outlook on their local job situation. Crisis countries were at the extreme end of pessimism: in Portugal, 84% thought it was a “bad time” to find a job; in Italy, 91%; in Spain, 92%; in Ireland, 93%; and in Greece, 96%.

Hey Turd. Let's put on our

Submitted by TheGoodDoctor on February 1, 2012 - 9:58pm.

Hey Turd. Let's put on our thinking caps here. What does that article hint at perhaps about the Greek default? Would that mean it would be a hard default? Why would they prepare for negative interest rates unless they speculated a shit load of cash would be incoming for treasuries? Just thinking.

Good Write up there TF

Submitted by Gramp on February 1, 2012 - 10:01pm.

Man it is tough trying to open people's eyes...

Even if they get what I'm saying about Physical assets, when it come to Au/Ag, The "Normalcy Bias" is so strong, that the only way they can see The PMs having value is in a SHTF situation...

Frustrated, I tried to explain that the metals can help preserve purchasing power as paper currency is devalued slow and steady.

What a waste of time and I need help...

Submitted by vonburpenstein on February 1, 2012 - 10:03pm.

...A few days back I got paid some frns and ended up getting $500 worth in quarters for the fun of it just to see what I might find.....well, 2000 coins later - I didn't find JACK, nada...closest thing were a few '65s. It was something fun to do with the kids but I don't recommend wasting your time, even if I'd a found any treasure it would've hardly been worth the time.

MORE IMPORTANTLY!!! I finally got my Brother in Law's attention! He's a genius (Not really, only a lawyer) and even has some political aspirations. I've been working on him for a while, a little snipet here, a couple of intriguing questions there. ANYWAY, he wants me to send him an article so he can read it and do a little critical thinking....I have an opportunity to open his eyes and I got one good shot here. I thought about the first article I read from 'The Burning Platform' guy, but I know there have been some incredible, ALL ENCOMPASSING articles or comments that have been made right here in Turdville, I just can't remember exactly when and where...Can anyone help? I'd prefer it to be more economically directed if possible. Your help would be greatly appreciated and I look forward to some options...Thanks in Advance. This place is where the awakening is growing out from and I wanna be part of the re-education society, c'mon back

Von Burp

Youth Unemployment

Submitted by GenXer on February 1, 2012 - 10:05pm.

I had a question on how youth unemployment figures were calculated. As I understand it youth means ages 16-24. Is the unemployment figure obtained from including those who are still at school or college? Or does the statistic exclude those students who are studying?

Um wow

Submitted by stalking wolf on February 1, 2012 - 10:07pm.

I love this formula thanks so much! Way better then my Physics class! Any math like this that is actually useful in day to day stuff is my shiznick!

acer / TF

Submitted by IndigoStar7 on February 1, 2012 - 10:08pm.

First of all, welcome aboard.

I just went through that last thread and noticed you were first and now second. Pretty slick

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Thanks for the update TF.

Gold is going to spike up hard in 2012 and they'll all eat crow about gold being barbarous and over priced with no rate of return etc.

$2000 is the number that will capture the imagination of the investing public and I think we end the year right around there after having breached $2100 once in the coming 8 months.

That's my fun guess for the night.

ALF Field Elliot Wave Predictions

Submitted by HKS on February 1, 2012 - 10:10pm.

There seemed to be some negative comments on the previous thread regarding Alf Field's elliot wave predictions of $4500 for gold and 158 for silver. The idea centred around the belief that these targets were to low.

The predictions that Alf has made are for Major three of three which refers to the wave count within the bull market. The main point that I am trying to make is that Alf is not making predictions about the final high within this bull market but simply where this next leg should take us over the next couple of years. Truth be told Alf is looking for a final target of over $10,000 for gold.

Hope this clarifies

So does this mean or will it

Submitted by rckymtn on February 1, 2012 - 10:12pm.

So does this mean or will it lead to banks charging you $$$ to hold cash in your accounts? Will your money market accounts now be taking your money?

Seems like they are trying to scare people into spending all their money and basically trying to create a hyperinflation type event. Markets blow upwards...real things blow upwards etc.etc.

Negative interest rates

Submitted by CorruptionPays on February 1, 2012 - 10:12pm.

Boy, that's makin' my head hurt. So demand for Treasury's will be so strong that they will charge people to own them? And the reason you want to own them is because they are losing value less fast than cash?

Thanks TF and speaking of barbarous...

Submitted by Maryann on February 1, 2012 - 10:12pm.

Thank you so much for this explanation. I saw that article on ZH today but you put it all together in such a clear way, TF!

While helping my kiddo with homework, we read that during the third century the barbarian soldiers in the Roman army would only accept gold for payment. Pretty smart barbarians.....

Thinking cap again. Or will

Submitted by TheGoodDoctor on February 1, 2012 - 10:14pm.

Thinking cap again. Or will they be going after pensions and 401ks? With the requirement of buying negative interest rate treasuries? Would this be to help pay off the debt too? Or just help to increase spending?

What if no one buys them?

you nailed it!

Submitted by CorruptionPays on February 1, 2012 - 10:17pm.

@TheGoodDoctor

They let the rates go negative and then the banks et al dump them onto the pension fund/IRAs!

Negative rates equals

Submitted by CorruptionPays on February 1, 2012 - 10:19pm.

Banks paid above par for the treasuries!

1750.00

Submitted by treefrog on February 1, 2012 - 10:20pm.

again

...and again.

I'll go with the first one, doc

Submitted by Turd Ferguson on February 1, 2012 - 10:21pm.

MODERATOR

I was thinking about that, too.
Are they anticipating such overwhelming demand for "safe" treasuries that they need a platform to facillitate negative rate auctions ASAP??
Makes sense to me.

Response to: Thinking cap again. Or will

@vonburpenstein - Great Article by one of our own Turdites!

Submitted by Be Prepared on February 1, 2012 - 10:28pm.

Here's a link to the pdf of the Article written a few days ago by Steve St. Angel0 - The Coming Paradigm Shift in Silver.......

It's a great article for your B-i-L to digest!

How does this work out

Submitted by CorruptionPays on February 1, 2012 - 10:29pm.

The Fed is buying 80% of the treasuries now. So they will pay above par? What the heck does that do to their balance sheet? They spent above par but have an asset held at par.

@DPH

Submitted by acer rubrum on February 1, 2012 - 10:32pm.

Thanks, now I have to try for "turd"

Chapman

Submitted by tyberious on February 1, 2012 - 10:37pm.

Has mentioned that he thought the Gov. would eventually go after the pension funds and offer the Gov paper, looks like he was right. His latest was after the election.

CorruptionPays they will do it selectively: Government pension funds that purchase bonds or treasuries receive negative rates, but for the banks and the fed it will be status quo.

GoodDoctor - You Hit the Bulls Eye

Submitted by boricuadigm-shift on February 1, 2012 - 10:38pm.

Wow! Excellent deduction my friend! The Greece default-nonISDA-default will bring many European banks and "speculators" down in flames. Expect a rush from equities into treasuries. Wow! Wow! Wow!

@vonburp

Submitted by Vypuero on February 1, 2012 - 10:39pm.

I also suggest Charles Hugh Smith and his various articles or his book:

http://www.oftwominds.com/blog.html

Charging people to hold cash

Submitted by CorruptionPays on February 1, 2012 - 10:42pm.

I read a theory once that thought that would be a great tax system. A side thought was that it would give everyone an incentive to keep the cash circulating, easing liquidity problems. So I guess under this system you wouldn't want to sit on huge piles of cash for a long time.

good stuff..... real interest rates

Submitted by T on February 1, 2012 - 10:42pm.

it will be better to own precious metals.

I continue to be a little worried about owning miners though, because as Andy Hoffman has been saying, the manipulation continues, and this week has shown it pretty clearly, if you look closely at your miners price action in recent days, you can see happening, exactly the kind of manipulation Andy describes. Maybe in the metals as well, but more so in the miners.

Maybe with QE3 ratcheting up now we will see a big move up in equities, including miners, but the manipulation of miners is leaving a sour feeling as I come to see better, what Andy is ranting about. Stay cautious and defensive owning miners.

10% of the new debt ceiling raise

Submitted by zilverreiger on February 1, 2012 - 10:44pm.

already used up in 2 days! wuhaha greece at the pacific

CONTEST SPREADSHEET IS COMPLETED

Submitted by H - original on February 1, 2012 - 10:46pm.

https://docs.google.com/spreadsheet/ccc?key=0AkbhQfELraBedEphbGVKS2xGVm1IbWVLaGlkRzRqanc

Love being able to help out on the competition... but boy.. the sheer volume on this one left me feeling a bit like this:

@Von Burp

Submitted by Pete on February 1, 2012 - 10:51pm.

VB,

I personally think the best fundamental articles can be found in the Alf Field archive at kitco.com and some other sites as well

A rush into treasuries would

Submitted by CorruptionPays on February 1, 2012 - 10:51pm.

eliminate the spread for the banks. ie: Fed loaning cash @ 0% and huge demand for treasuries drives yield to 0%. No incentive to buy because the spread has been eliminated, unless rates can go negative.

vonburpenstein What a waste of time and I need help...

Submitted by paulindoon on February 1, 2012 - 10:52pm.

Along with "Be Prepared" suggestion, I would suggest this article for more good info:

http://community.nasdaq.com/News/2012-01/the-silver-singularity-is-near....

Thanks H

Submitted by IndigoStar7 on February 1, 2012 - 10:52pm.

Great job, we all appreciate the effort

That was a tsunami of newbs/lurkers who came out of the wood work the last day or so. Nice to see lots of new names and ones I haven't seen in awhile.

I can't wait for the rush into gold!!

Submitted by San Diego Gold Bug on February 1, 2012 - 11:03pm.

I was in my local bullion store today buying some more silver. It was very crowded. They had a customer at the counter who sold 220 AGE's (almost 400k). The guy left and while I was waiting and during my purchase i heard the owner say to his guys "the 220 AGE's are now sold from phone orders". That was 400k in phyzz gold sales from ONE dealer in only ten minutes. Just imagine what will happen when 1% more get on board!!

Pack em stack em and rack em!

Negative rates!!

Submitted by Bagholder on February 1, 2012 - 11:03pm.

Gold always flourishes in an environment of negative real rates. Better yet is the situation we have today - negative real rates that are also falling!! In other words they are getting more negative by the day. You cannot dream up a better scenario for Gold going forward than negative & falling real interest rates.

As long as TPTB use their monkees in the MSM to sell two of the biggest lies in the history of the planet, namely "Gold is Risky" and "Bonds are safe" - there will be a signifigant percentage of morons who will gladly pay $1010 to lock in $1000 at maturity. They do it willingly, because the way they see it, there is no risk.

Stop laughing, I'm serious.

1750!!!

Submitted by gatortrader on February 1, 2012 - 11:05pm.

Looks like they r capping it all right

VonB

Submitted by Ferd Torgerson on February 1, 2012 - 11:07pm.

In addition to articles, you may want to have your relative view these two videos.

First, this presentation by Mike Maloney "Gold and Silver Debt Collapse"

And this presentation by Jim Rickards from December 2010.

http://outerdnn.outer.jhuapl.edu/rethinking/VideoArchives/MrJamesGRickar...

I first saw Rickards' video last February when I was first getting involved in PMs and was a newbie to Turdville. It made a lasting impression on me.

Good luck.

Ferd

GOLD ( and almost SILVER ) to rule them all!

Submitted by CaribSurfKing on February 1, 2012 - 11:08pm.

What this means is there will be too much pressure from all investors to get into Gold.

If gold keeps out pacing paper ( which will now be actually going down in the number you hold ), investors and their brokers will be forced into what is winning, which is Gold.

Gold will just pull Silver along for the ride.

What an investor really wants is Gold that pays dividends which should be a great Gold fund, but if we keep printing like this as Santa said, more money will flow into NetGoogleAppleBookFlixIn than Gold stocks.

http://www.google.com/finance?chdnp=1&chfdeh=0&chdet=1328151908317&chddm...

This chart shows that, well since all the QE madness, its all about GOLD! With beaten down SILVER snapping at its heels! Gold stocks next and finally crappy old NASDAQ in dead last!

Are negative interest rates

Submitted by CorruptionPays on February 1, 2012 - 11:08pm.

The opposite of growth? I mean if the economy must grow so that all interest can be paid, is this the opposite? Does this just match the deleveraging that is occurring? So instead of PD's paying minimal interest to the Fed, the Fed pays them to take the money? So many questions. . .

Do as I say...

Submitted by Dr Jerome on February 1, 2012 - 11:09pm.

My apologies to Dr G for borrowing his Obama pic from the last thread, but I thought it needed a couple of additions. Just having some fun with photo editing software lately.