ZIRP Morphs to NIRP

50
Wed, Aug 27, 2014 - 11:29am

Never in my wildest dreams did I envision having a job where I wrote about acronyms like "ZIRP" and "NIRP". But, I guess, never in my wildest dreams did I think that the world would get as utterly screwed up as it is.

First, just to make sure we're all on the same page...

ZIRP: https://en.wikipedia.org/wiki/Zero_interest-rate_policy

ZIRP is the official policy of The US Federal Reserve and it has been since The Great Financial Crisis of 2008...which I might remind you was SIX FREAKING YEARS AGO.

NIRP: https://www.zerohedge.com/news/2014-06-05/nirp-has-arrived-europe-offici...

NIRP is still so new that there's not a even Wikipedia page for it yet. Maybe we should start one? If we don't, someone will. NIRP is Negative Interest Rate Policy and it's here to stay. This is where you pay interest to the bank or some other "lender" like a government for the privilege of having them hold your cash for you.

Why does this matter and why I am bringing this up again today? Because it's just another reason that gold (and silver) are NOT going dramatically lower from here. All of the TA-only fools who count their waves and draw their lines are simply checking their brains at the door and not using common sense. Just as the laws of supply and demand will prohibit another steep drop in price, a world of NIRP will do the same. For when the world is so awash in fiat currency that lenders are actually able to charge interest to their borrowers, that's a pretty telling sign that the devaluation of paper money continues at a breakneck pace. "Investors" may, so far, be slow to return to the safety of precious metal. With NIRP as the new norm, that won't last much longer.

As we've been chronicling since January, U.S. rates have been falling all year...dramatically. Though nearly every "analyst" was projecting higher rates in 2014 due to the alleged "taper" of QE, long-term rates have instead fallen nearly 25%! The 10-year Note, which began the year at 3.0%, has a yield this morning of 2.37% and the 30-year Long Bond, which began 2014 at 4.0%, sits at 3.13%.

But that's just the U.S. Did you know that, in Germany, rates are now negative out to three years and that the 10-year Bund is now yielding just 0.90%? https://www.zerohedge.com/news/2014-08-27/greatest-depression-german-yie...

And to give you some idea of the scale and magnitude of all of this, take a quick look at Portugal. Yes, that Portugal...the one with worst banking system in all of western Europe...the one that just saw its second largest bank get wiped out. Yes, that Portugal...the "P" in "PIIGS, for heaven's sake! Two and a half years ago, the yield on a 10-year Portuguese Note surpassed 15%. One year ago, it was still near 7%. Today? It's now near 3% and falling!

https://www.zerohedge.com/news/portugal-10-year-yield-passes-15-first-ti...

https://www.bloomberg.com/quote/GSPT10YR:IND

What in the name of Jim Grant is going on here?

It's simple, really. After 5+ years of global QE, the world is awash in cash. It's everywhere and permeating everything, from stocks and bonds to luxury real estate. And when you're a hedge fund that is flush with cash and desperately looking for a "safe place" to park it, you'll actually pay the German government interest to hold onto it for you. You might even be outright crazy enough to think that earning 3% from the Portuguese government is a good deal.

And, in this environment, where the cash is going to keep flowing and the fiat devaluation is only going to continue, do you really expect higher U.S. interest rates anytime soon? And, as you know, despite all of the Fed and CNBS jaw-boning, the U.S. can't afford higher rates anyway because of the near-immediate impact on the interest payments of the accumulated $17T+ national debt.

Therefore, the charts below are extraordinarily important as you assess the future trend of precious metals prices. Will prices fall below The Double Bottom of $1180 and head to $900 as some of the chartreaders are saying or will real world practicality take over? I know that these charts aren't perfect and that the scales for each side aren't exact but, nonetheless, you can plainly see the long-term correlation between interest rates and paper gold trading. As rates fall, gold prices rise. Why? Primarily because your classically-trained hedge fund manager recognizes that low and negative rates/real rates are, and have always been, a solid rationale for owning precious metal.

"So, I'm confused. What's the point of all this, Turd?"

Look, if you accept the notion that:

  1. Global interest rates are not headed higher, and
  2. Low/negative interest rates historically cause gold and silver prices to rise

Then you can rightly assume that gold prices ARE NOT headed lower, regardless of what some Wave Counter might think. In fact, should rates continue falling in the very near term, we should expect a sudden reversal in the short-term trend of gold, very likely as soon as market participants and depth return following the end of summer holidays. You can see it in this 2014 chart of the Long Bond vs gold:

And you can see it in this chart of just gold by itself. Price has bottomed again at the intersection of the long-term trendline from May 2013 and the short-term support line for 2014:

So, don't let your heart be troubled by this current decline. As you know, this is all playing out as predicted back in June after price first broke through the long-term trendline. And, for all of calendar 2014, the price action is proceeding along nicely toward the goals we laid out back in January. Again, recognize all of this for what it is and plan/prepare accordingly.

TF

About the Author

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turd [at] tfmetalsreport [dot] com ()

  50 Comments

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lamareArtL
Aug 30, 2014 - 10:30am

Re: What would you trade your silver for when the Silver..

What would you trade your silver for when the Silver price explodes?

I hope to be able to buy a farm with some land when this happens, along the lessons of The Great Hernán P.:

https://gonzalolira.blogspot.nl/2011/02/inflation-hyperinflation-and-real.html

[Real] estate sellers—who depend on lenders to provide their buyers with credit in order to sell their properties—are forced to lower their prices, in order to attract buyers. Law of supply and demand: They cannot force up the price of their real estate to match the pace of inflation, because if they do, they will simply not have any buyers.

[...]

And when there is hyperinflation, real estate prices of all sorts—residential, commercial, industrial—go into a free-fall: Their prices crash and burn, completely and utterly.

This situation—crazy though it may sound—is exactly what happened in Argentina, in 2001: The Argentine peso went into a hyperinflationary breakdown, the causes of which are irrelevant to the present discussion. But because of this, no bank would lend money to purchase any real estate.

Thus, real estate prices plunged in Argentina.

I have a family friend here in Chile, an attorney named Hernán P., who made one of the shrewdest investments ever: At the height of the Argentine crisis in 2001, he bought an apartment in one of the most fashionable neighborhoods in Buenos Aires: A lovely and luxurious full-floor apartment, across the street from the Four Seasons.

It’s price before the crisis? $650,000. The price Hernán P. paid at the height of the crisis? Less than $90,000. Here’s the kicker: He was the only buyer. Of course, he had to pay in cash—no mortgage loans were available. In fact, he had to pay in cash cash: He was required by the seller to close the transaction with actual physical dollars.

I believe silver (and gold) coins will soon be about the only money that can count as "actual physical dollars" in this Argentina example.

SIlverbee
Aug 29, 2014 - 8:18am

Mr Bologna Sausage is back pedalling

All the technical analysis to make it seem like science and difficult for the layman and then back track if it starts to look like your predictions are wrong; Ha!

Was saying $2000 by Christmas now nearer $2000 than $1300. Wow what a prediction I could have said that but I don't get posted on numerous PM sites. So if its $1650 is is still right, hmm, wait lets see if we get nearer the time he don't come back with another blog with the price at $1575 and claim a victory?

Bongo Jim
Aug 28, 2014 - 9:01pm

Stong hands and hard core

"If you are really hard core- no fiat price will be acceptable."

The question arises what are you holding you PMs for? At what price will you say uncle? Then the question is what will you do with the fiat? Will it be so inflated at that time that a loaf of bread is $50? Will there be an inequity of tangibles that make for a good trade? Will your timing be right that you can get out at the top (or near) and trade for something that now is in a bubble but then will have deflated? Or is it insurance so after the crash/reset you can use it to stay alive/thrive? As it has been said, everything has a price...what's yours?

transplanted baby
Aug 28, 2014 - 7:20pm

Agree with Chris Powell

I agree with Chris Powell that TPTB can trash gold more thru paper sales. But it can't go on forever- I think. Someone on a previous thread mentioned that the weak hands have been shaken out and gold is now being held by "strong hands". The question then becomes "At what fiat price are these strong hands going be willing to trade gold for fiat?" If you are really hard core- no fiat price will be acceptable. What will the world look like then?

ancientmoney
Aug 28, 2014 - 6:11pm

Yes, I know

We've been emailing each other about that today. In fact, he pointed out to me that the title had a misspelling so I changed "Morphes" into "Morphs".

ancientmoney
Aug 28, 2014 - 5:57pm

Turd, Chris Powell of GATA sees it differently . . .

He thinks PM prices can still be driven lower, because the CBs can underwrite unlimited sales of paper gold and silver:

"Central bank gold sales and leasing, the underpinnings of the world's fractional-reserve gold banking system, whereby huge amounts of imaginary "paper" gold are created to nullify gold's scarcity and suppress its price, were always plainly mechanisms of "financial repression" to defend currencies and government bond prices. So amid the descent into negative real interest rates, what is to prevent central banks from underwriting still more "paper" gold for price suppression?

Such a policy probably could be defeated only by 1) mass exposure, which would require the mainstream financial news media to stop averting its gaze and to resolve to hold government to account; 2) a major sovereign foreign-exchange surplus holder's decision to switch its surplus heavily and abruptly into gold to strike a political blow; or 3) by the simple exhaustion of the gold reserves of the nations participating in gold price suppression, the circumstances that collapsed the last acknowledged mechanism of price suppression, the London Gold Pool, in March 1968:

https://en.wikipedia.org/wiki/London_Gold_Pool

The point here is that natural, economic, and even societal laws are disintegrating throughout the world under the pressure of what is essentially totalitarianism, the totalitarianism of central banking, which thrives only because, like the new clothes of the emperor in the fairy tale, it cannot be acknowledged for what it is -- cannot even be examined and questioned."

He does provide for possible solutions, however.

https://gata.org/node/14381

SE
Aug 28, 2014 - 2:46pm

Difference between fiat and gold

In regards to NIRP. Let me ask... If you have gold/silver, and you need a warehouse to hold it for you so that you can use it as a check/debit card instead of having it on your person, why should said warehouse not charge you for the service of safekeeping? It would be like a mechanic selling you parts for the repairs needed MINUS his labor. Who in hell would do that? Banks! They did it because of the fractional banking system. Interest was a way to keep people in paper, and out of tangibles.

Is there any POSSIBILITY that one reason banks went to ZIRP for several years, and now NIRP for personal savings and CD accounts is to soften up customer's expectation of interest rates in anticipation of a return to some sort of metal-backed money, or even gold-silver itself? Imagine going from savings with 5-7% straight to a gold/silver standard where you have to pay a nominal fee for metal storage/account management. I would think that the former option of gradually eliminating interest payments in favor of fees for metals storage would be a more survivable strategy than the sudden shift with no mental preparation of the public.

This is assuming that the gold that we're supposed to have nationally exists, so that may not be a valid reason why we have transitioned thus far to NIRP. If it is a valid reason, then it won't end there and instead end up as storage/maintenance fees with no pretentions about interest rates, not even negative rates. Just like storage fees for storage facilities. You pay so much a month or a year to store something of value to you.

Safety Dan
Aug 28, 2014 - 12:34am

Clarification on Bonds & Markets

The Bond Market Explained for Mohamed El-Erian

Posted by: EconMatters

Post date: 08/15/2014 - 15:49

The fundamental mistake is to think in terms of a low yield telling you anything about the economy, as it is price that you should be focusing on.

Business Media Rock Star

On Thursday Mohamed A. El-Erian was on CNBC`s Halftime Report and he said something that a lot of people have been saying regarding the bond market, and it needs to be cleared up, because the amount of poor understanding regarding the bond market by people who make their living, i.e., are in the financial market business is astounding. It is even more mind blowing given that Mohamed A. El-Erian actually worked at a Bond Firm in PIMCO, and helped manage Harvard` s endowment in the past.

Read More >>> The Pitfall of Rock Star Economists

Just Mirrors What Everybody Else Says

He reiterated what many have said, and I will paraphrase that the Bond Market and Stock Market are telling you two different stories about the economy. This is just flat out wrong, and shows a poor understanding of what has been going on in the Bond Market ever since QE and zero percentinterest rates became the default central bank policy. And frankly it is a mistake that should never be made by someone who worked at PIMCO, a firm that specializes in bonds for goodness sake! I know his role was mainly to represent PIMCO and go on Television, and create exposure for the firm, but he has access to the best minds of the industry every day, and he is completely clueless when it comes to such an important distinction regarding the bond market. Moreover, since many people make this same mistake I thought I would clear this false notion up once and for all regarding bonds.

Read More >>> The Bond Market Explained For CNBC

You've seen the proof that U.S. government finances are a mess. You've heard the arguments that we're undermining the dollar's unique status as the world's reserve currency with toxic amounts of debt. You know it's not going to end well.

See this video - https://www.youtube.com/watch?v=JDWVvMZWy7Y

​See this Presentation on Sovereign borrowing outlook:

https://www.slideshare.net/OECD-DAF/oecd-sovereign-borrowing-outlook

Enjoy, and looking forward to your comments..

Visit the FAQ page to learn how to track your last read comment, add images, embed videos, tweets, and animated gifs, and more.

Safety Dan
Aug 28, 2014 - 12:29am

US T Bonds..

https://www.tfmetalsreport.com/comment/267131#comment-267131

Crunch Time: Fiscal Crises and the Role of Monetary Policy

EXECUTIVE SUMMARY Crunch Time: Fiscal Crises and

Countries with high debt loads are vulnerable to an adverse feedback loop in which doubts by lenders lead to higher sovereign interest rates which in turn make the debt problems more severe.

We analyze the recent experience of advanced economies using both econometric methods and case studies and concluded that countries with debt above 80% of GDP and persistent current-account deficits are vulnerable to a rapid fiscal deterioration as a result of these tipping-point dynamics. Such feedback is left out of current long-term U.S. budget projections and could make it much more difficult for the U.S. to maintain a sustainable budget course. A potential fiscal crunch also puts fundamental limits on what monetary policy is able to achieve.

In simulations of the Federal Reserve’s balance sheet, we find that under our baseline assumptions, in 2017-18 the Fed will be running sizable income losses on its portfolio net of operating and other expenses and therefore for a time will be unable to make remittances to the U.S. Treasury. Under alternative scenarios that allow for an emergence of fiscal concerns, the Fed’s net losses would be more substantial.

The author of this paper is Benny B's mentor - Frederic Mishkin

If the Fed's cannot make payments to the US Treasury, what will happen?

Treasury Bonds or 'Carter Bonds' were issued in 1978 by the US Treasury, denoted German Marks & Swiss Francs.

https://books.google.com.ph/books?id=XzJTuzqAmNoC&pg=PA269&lpg=PA269&dq=US+bonds+Carter+bonds+francs&source=bl&ots=JjmITBH-fC&sig=SQ_98bGwvEaXAqd1p9KTZfo-fYY&hl=en&sa=X&ei=Z8_yU_z-BcXZoASvoIGoAQ&redir_esc=y#v=onepage&q=US%20bonds%20Carter%20bonds%20francs&f=false

Carter bonds were used to stablize the "Full faith and credit" of the US Dollar. I wonder if they will need to do that again?

SS121Doctor J
Aug 27, 2014 - 8:39pm

toward Dr. J's USD question...

The Nail In The Petrodollar Coffin: Gazprom Begins Accepting Payment For Oil In Ruble, Yuan

I know this will weaken the dollar, but how exactly does it happen. Can someone explain?

Their premise is false, that's why the flawed logic doesn't resonate.

The USD

  • The USD is the National Currency for the U.S.A.
  • In the 'system', the USD is the World Reserve Currency (held by Central Banks, used for international trade)
  • In the 'system', the USD is the World Currency Standard (benchmark by which all other fiats are measured)

TPTB can NOT write stories that : The USD is no longer used as the U.S. National Currency (obviously)

And TPTB can NOT write stories that : The USD is no longer the World Currency Standard (it is the single fiat currency by which 100% of all other fiats are valued)

So they write stories that countries are sometimes using their own currencies for trade and that this is a sign-

(: "Nail in the Coffin!!") that the USD is dying.

It's just a story. ...or just "another" story, that TPTB are pumping as the sun sets on their dying 'system'.

Just keep stackin' it up, and unless absolutely necessary- don't let go of any physical Silver as long as the system's silver chart is still setting the prices!

The system is dying, not the USD.

Time is now on the side of those holding Dollars, or preferably Silver, and who are NOT in the 'system'.

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