As irrational as they sound, these ideas are being promoted. This morning 7-13-2022 interest rates and inflation are indeed up and gold is down.
Gold Drops to a 16-Month Low as US Inflation Rose to the Highest Since 1981 in June
"MT NEWSWIRES 6:16 AM ET 7/13/2022
09:16 AM EDT, 07/13/2022 (MT Newswires) -- Gold prices fell to a 16-month low early on Wednesday after the United States reported inflation rose at the fastest pace in 41 years in June, stoking the dollar and cutting bond yields.
Gold for August delivery was last seen down US$17.10 to US$1,707.70 per ounce, the lowest since March, 2021, after touching US$1,729.70 prior to the release of the US inflation data.
US prices rose by 9.1% in June, the fastest pace since 1981 and ahead of the consensus analyst estimate of 8.8%, according to Marketwatch. The unexpectedly strong increase is likely to prompt yet higher interest rates from the Federal Reserve, raising recession worries with European stock markets dropping following the release of the data while futures point to a lower open for most US exchanges.
The US dollar surged following the release on expectations of higher rates, making the metal more expensive for international buyers. The ICE dollar index was last seen up 0.31 points to 108.36.
Bond yields also rose sharply on expectations higher rates are on the way, bearish for gold since it offers no interest. The yield on the US 10-year note was last seen up 6.9 basis points to 3.047%."
The Myth That Higher Interest Rates and Higher Inflation Make Gold Drop
For thousands of years gold and silver has been a successful inflation hedge. In 1960 a silver quarter in circulation would buy a gallon of gas and ever since then it consistently has still bought a gallon of gas. Today a silver quarter also still buys a loaf of bread as it did in 1960.
Gold has done ever better. It buys a lot more oil than it did in 1960. In 2020 gold bought 7 times more oil than it did in 1960 as this Gold to Oil Ratio Chart shows and even at $120 oil about 50% more oil.
We just had the first 9%+ annualized inflation rate today since 1970s. How did gold do then?
Gold soared as we went into this type of inflation. Do note that in 1976 gold did go down as inflation continued to go up, but that is the exception, gold then exploded upward 1977 to 1980.
What about the constantly repeated myth that higher interest rates decrease gold prices?
There is no decade in last 100 years that had interest rates go up more than they did in the 1970s. This is common sense, when inflation goes up, interest rates naturally do too. You could get over 14% interest rates on treasuries by the end of the 1970s.
As you see the higher interest rates go the higher gold did. We are being pushed a myth that if interest rates go up gold has to go down. Real interest rates adjusted for inflation is a good indicator for gold price, negative real interest rates do boost gold. But that when inflation gets really high, even with positive interest rates which did exist in 1970s, gold soared.
Real Interest Rates Vs Gold?
The above Chart shows how when interest rates are below the inflation rate it boosts gold. Note the negative rates are worse on that chart in reality, as the government has altered the formula many times over decades to undercount the real inflation rate.
The chart below reverses real interest rates so you can see the relationship between it and gold in parallel.
Amazing how precise that relationship has been. Today we have 9% inflation and 3% interest rates, that is extreme -6% real interest rates. Gold's drop is an irrational and, in my opinion, temporary aberration that will resolve with gold going higher.
What about positive real interest rates if the Fed goes to 10% treasuries?
This has been pointed out by many to be basically impossible to have positive interest rates due to the size of the national debt. Yes in 1979-1980 it was done, but the size of our debt compared to our GDP was tiny then compared to today. The US government cannot afford to pay 10% intertest rates today. We have $30.5 Trillion of debt so it would cost over $3 Trillion per year at 10%. That would ruin they already terrible budget situation.
So does that mean that gold and silver should go even higher than it did in 1980, as we cannot get to real positive interest rates? Yes, would be the most likely answer. What is the reason this obvious myth about high inflation and high interest rates being ruinous for gold prices being pushed? It may be to hold gold down, so people think there is not an alternative to the USD. To help prop up the dollar. Note that the reason the USD is going up versus the Euro and other currencies is not that the USD is going up, indeed it is now going down 9% a year that they admit. It is that the other fiat currencies are going down even more.
If gold goes to $3,000 the public will rush into it like the rushed into gold at $300 in the 1970s. Does the US government want competition for the USD? Of course not. That might be the motive for this myth explored in this article. What will happen to highly undervalued gold miner stocks if gold goes to $3,000? Rationally the same thing that happened in 1970s to 1980, a mega rally.
What do you think?
Is it different this time? Do you think high inflation will make gold drop long-term?
