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Tuesday, May 12, 2015

Gold and Negative Rates

Gold is supposed to do extremely well during periods of Negative Real Rates.

What are Negative Real Rates?  Interest Rates that are below the rate of inflation. They occur when banks and borrowers do not adequately compensate savers and lenders for the cost of borrowing money.  Therefore Money does not have a stable value as measured by its rate of return.  Thus the value of gold rises commensurately to hedge against a shaky financial system.

Right now, for the first time in the history of the world we don't just have negate real rates.  We have NEGATIVE RATES.  What are they?  They occur when banks and borrowers charge savers and lenders for the privilege of lending them money.

This has never before occurred because it makes no conceptual sense.  Why lend money if it costs you to do so?

There is no answer to this question.  Yet it is now occurring most everywhere around the globe, simply because Governments in collusion with Big Banks, have decreed it must be so, and the populace has, so far,  buckled under en mass.

One could argue that if Deflation were so rampant that Prices are dropping so quickly, then by the time money is repaid everything will be so much cheaper.  Yet then, still, why lend the money?  Why not just hold it?  Why on earth allow yourself to be charged for assuming unnecessary risk?

Well, because Governments have made holding cash so onerous (and often illegal) that it's just easier to pay..

That's called Extortion.

At the same time, prices for things most citizens consider essential,  are not actually dropping.  In fact, most essential prices are rising alarmingly quickly.

Rent and housing prices have risen to near unaffordable levels.

Education has risen to near unaffordable levels.

Health Care has risen to near unaffordable levels.

Insurance Rates have risen to near unaffordable levels.

Food that has any nutritional value has risen sharply.

Gasoline prices have dropped.  Yet they are still historically high.

Socks and tooth paste and paper clips and other stuff you can get at the 99 cent store a pretty cheap.  Whoopie.

How can Rates be Negative when Prices are so high?

It makes no sense.

Negative Rates make no sense.  But negative rates in an environment where cash is actually losing value makes negative sense.

Yet it is so.

How can Gold be so cheap in this extraordinarily unstable environment?

Many people will argue that this is proof that gold is essentially value-less.  That gold is a dead asset.  That since this is the perfect environment for gold, yet it is languishing, proves that gold is now useless.

However this argument is missing one crucial fact: We are not now in crisis.  We still have a semblance of order.  We have a semblance of stability.

We are a two ton elelphant balancing on point of a 700 foot needle.  Conceptually this is impossible.  Yet there we are.  And we have not yet toppled.

If we do topple, gold will soar.

If we can balance precariously like this for ever, gold will languish.

It's your bet.

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