Inflation is clearly on the rise. Just look at food and gas prices. Look at medical expenses and the cost of building a house. Look at the booming commodity prices of copper, aluminum, lumber, soybeans etc.… And, just look at the trillions of dollars being injected into the system via stimulus packages and Quantitative Easing. Even The Fed has made it very clear they want higher inflation.
So, if higher inflation is good for gold, why are gold prices not rising currently?
Because nominal interest rates are rising as well (the 10-year Treasury Note rate has recently risen from 1% to 1.7%) and the bullion banks, like JP Morgan, have used this as an opportunity to sell gold contracts on the NY and London Exchanges. (Technically, rising interest rates increases golds “cost of carry” AND higher interest/savings rates makes gold less attractive).
However, it is critical for investors to know that REAL interest rates (nominal interest rates minus inflation) are negative, and negative real interest rates are very gold/silver positive. Also, it makes sense The Fed will do everything in their power now to get nominal interest rates back down again to reduce the interest cost on their skyrocketing debt. So, lower nominal interest rates in the short term are very gold/silver favorable. In all, there has never been a better time in history to own physical gold and silver:
- Current gold and silver prices are artificially low thanks to the bullion banks.
- Money supply and inflation are on the rise which is dollar bearish.
- Te supply/demand fundamentals for gold and silver worldwide are wildly bullish.
The following words by Matthew Piepenburg of Matterhorn Asset Management explains further the current dynamics of negative real interest rates, as well as their relevance in the 1970’s:
And that’s why it’s so essential to understand how important that CPI number is to the “powers that be” — these open liars. In a sense I can’t blame them for wanting to manipulate and use mathematical gymnastics at the Bureau of Labor and Statistics to downplay real inflation. Because if they were simply to use the same scale they used in the 1980’s or ‘90s, we’d be at 7%-8% inflation. And if the Treasury was at 1.7% yield, whether it’s 7%, 8% or 10% real inflation, you would be looking at about negative 7% real yields! In the ‘70s, when you were talking about that backdrop, real rates were about negative 4%, and gold skyrocketed during that period.
And it’s a joke. If someone were to ask me, “Well, Matt, fine. If that’s true, if inflation is everything and the CPI is rigged, who are we to fight the Fed, fight the rigged number?”
At some point, with the rising costs of consumer goods, and the wages not competing with that, the inflation becomes too hard to lie about. It’s literally like a weatherman who tells you it’s sunny outside and you look out your window and it’s pouring rain. You don’t need to be a meteorologist, you just know it’s raining. And at some point the inflation will become too hard to hide behind what is really an artificial CPI scale.
But again, inflation is everything. It’s more important relative to rates than rates. It really doesn’t matter if rates are 19% or 0%, as long as inflation is higher than that, you have negative real yields. Even now we have negative real yields, but the scope and speed of that negativity is important. During the big boom in gold in 2020, real yields went from 1% to negative 1%. That was a fast scope in change. So it’s not just having negative real yields, we want deeper negative real yields like we saw in the ‘70s (like we are experiencing now). We don’t have to go to negative 4%. But negative 2.5%-4% would be fine enough to send gold and silver ripping (higher).
What the central banks in the US and everywhere else want to do is have their cake and eat it too. They want higher inflation to inflate away their massively unpayable and unsustainable debt levels, but they don’t want to report it (inflation) too high because if they report it too high, it makes their IOU’s – their sovereign bonds — look unsexy and unwanted. And if their sovereign bonds are unlovable, no one will buy them but their own central banks.
And the truth is we are a country, like so many economies, that lives on those IOU’s. We need buyers for our IOU’s, for our sovereign bonds, for our Treasuries. But if the inflation-adjusted yields on those bonds are actually reported accurately, not only would no one buy them, but gold and silver would take off. And if gold and silver take off, that is a pure indication that the currency is no
longer valid or no longer credible, which is of course the biggest fear for any sovereign — to see their currency lose credibility.
So you see this tug of war, how desperate and important it is to keep inflation, that silly little thing, that silly little lever in the Rolex, that if you take it out of the watch, the whole mechanism collapses. If the CPI was accurately reported, right now we would be having a whole different conversation about gold and silver. The CPI is a powerful force and it is a powerful lie, but at some point it (true inflation) will be impossible to hide (and we are rapidly approaching that day).
—Matthew Piepenburg of Matterhorn Asset Management