In Case You Missed It

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!

TF

141 Comments

Ferd Torgerson's picture

No, I Didn't Miss Being

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.

acer rubrum's picture

first again

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

edit- note to self... too slow

Be Prepared's picture

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

stalking wolf's picture

Third! haha

Couldn't post on the last thread!

$1749.00 Gold

$33.85 Silver

stalking wolf's picture

Third! haha

Couldn't post on the last thread!

$1749.00 Gold

$33.85 Silver

stubbornman's picture

thurd (or 9th...)

Stack stack stack away!!!1

Magpie's picture

If wishes were horses...

1864.41

35.94

My bad, but it was prior to six here.  blush

StevenBHorse's picture

AGA

Anti-gold Asshole ?

Turd Ferguson's picture

Contest closed at 6:00

MODERATOR

Please. No more contest entries. 

We'll have another one again soon.

TheGoodDoctor's picture

I hope AGA = Anti Gold

I hope AGA = Anti Gold Assholes cheeky

Laurens1778's picture

implications

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

That's why I read this site everyday!

Turd Ferguson's picture

You got it, Big Daddy

MODERATOR

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

tyberious's picture

Humm

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!

Be Prepared's picture

Exodus from the Eurozone Debt Crisis

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%.

<Rest of the Article>

TheGoodDoctor's picture

Hey Turd. Let's put on our

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.

Gramp's picture

Good Write up there TF

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.

vonburpenstein's picture

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

...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

GenXer's picture

Youth Unemployment

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?

stalking wolf's picture

Um wow

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!

¤'s picture

acer / TF

First of all, welcome aboard. 

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

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

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.

HKS's picture

ALF Field Elliot Wave Predictions

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

rckymtn's picture

So does this mean or will it

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.

CorruptionPays's picture

Negative interest rates

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? 

Maryann's picture

Thanks TF and speaking of barbarous...

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.....smiley

TheGoodDoctor's picture

Thinking cap again. Or will

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?

CorruptionPays's picture

you nailed it!

@TheGoodDoctor

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

CorruptionPays's picture

Negative rates equals

Banks paid above par for the treasuries!

treefrog's picture

1750.00

again

...and again.

Turd Ferguson's picture

I'll go with the first one, doc

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.

Be Prepared's picture

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

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!

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