If you own gold or are considering buying it, please take the next few minutes and read this.

What I’m about to tell you changed is the truth about gold.

This simple truth was quite unconventional when I first started exposing it a few years ago.

Since it was new, the reception to it was quite varied.

Many gold industry heavyweights loved it. Many pundits and analysts adopted it for themselves. And, I’m happy to say, made good money in gold’s last bull run and got out the top because of it too.

Others weren’t so pleased. It undermined everything they ever thought they knew about gold.

Today I’m going to ask you to take a look at it and decide for yourself.

There’s No Fever Like Gold Fever

Gold has been on a big run over the last few weeks.

The price of an ounce of gold has jumped $170 from the start of the year to more than $1200 an ounce this year. And when any financial asset’s price shoots up investors rush into it.

We’re already starting to see anecdotal reports of surging demand for gold around the world.

Michael Cooper of ATS Bullion in London told The Telegraph last week, "It's been crazy - it's been the best week since 2012. We've had people queuing round the block…”

Certainly, a little hyperbole there. But I’m sure his gold bullion sales are truly soaring.

Mr. Cooper isn’t the only one experiencing demand. It’s worldwide.

The Perth Mint in Australia sold 586,000 ounces of gold in January 2015. It sold 1,473,000 just last month.

The U.S. Mint reports gold bullion coin sales doubled from December to January. And according to the weekly data, gold sales are on pace to double again in February.

This is a major change in sentiment towards gold. It’s a complete reversal to where it was a few short months ago.

But, here’s where things get tricky for most investors and it’s why they buy and sell gold at the worst possible times.

I’m going to start by asking you to forget about everything I just told you.

That’s right. Just forget about it.

Those “lines around the block” simply don’t matter to the long-term price of gold.

I realize we can talk endlessly about U.S. debt, politician’s ineptitude, recessions, depressions, and anything else that would end with the recommendation to “buy gold.”

There are plenty of wrongheaded commercials on the radio and TV for that.

Instead, we’ll focus on what really matters to the price of gold because it’s simple the best predictor of future gold prices there is.

The REAL Driver Of Gold Prices

The real driver of gold prices is interest rates.

More specifically, real interest rates.

Never heard of them? That’s fine. Today we’ll see what they are and why they are the single most important driver of gold prices.

Negative real interest rates are pretty simple once you break it down.

Let’s start with interest rates. They’re easy to find. Just pull up a quote for the yield on the 10-Year Treasury Bond, the benchmark interest rate for the entire world. It’s 1.75% as I write.

To determine the “real” interest rate, you just have to subtract inflation from that.

The benchmark inflation rate is the Consumer Price Index (Urban) Excluding Energy And Food (we’ll just call this index the CPI from here on).

The CPI over the last 12 months has been 2.1%.

Those two data points are all we need to find real interest rates - the current nominal interest rate of 1.75% and the current rate of inflation is 2.1%.

Again, to find the “real” rate you just subtract inflation from the nominal rate of interest.

So the current real interest rate is negative 0.35%.

That basically means, if you bought a 10-Year Treasury bond today and inflation stayed the same, you would lose 0.35% of value each year for the next 10 years.

Sound like a good investment? Hopefully not.

That’s the problem when real interest rates turn negative. There are almost no safe places to hide. Your savings will lose value in when real interest rates are negative. As a result, gold becomes the only safe store of value.

Now, I realize that’s a pretty convoluted theory. And we’ve looked at quite a few theories in the past. Few of them work. In this case, however, the reason I asked you to read about this is because this actually works incredibly well.

Take a look at the following charts to see.

First is the 10-Year U.S. Treasury Yield:

Board of Governors of the Federal Reserve System

Second is the rate of inflation:

World Bank

Third is the price of gold:

Price of Gold

All of those charts are pretty straightforward.

Just looking at them individually it’s pretty tough to see a clear pattern.
So in the next set of charts I’ve combined the first two (interest rates and inflation) and put the gold price chart right below it.

You should be able to spot a pattern now:

10-year Treasury Constant Maturity Rate

London Bullion Market

Note the top chart. When the rate of inflation (blue line) reaches the interest rate on the 10-Year U.S. Treasury Bond (red line), real interest rates have turned negative.

Now look at those few times real rates went negative and what happened to the price of gold.

Without fail, gold soared when interest rates turned into negative territory.

In the 1970s gold ran from $100 an ounce to more than $900 an ounce after a long period of extremely negative real interest rates.

Between 2003 and 2008 the real rate of interest dropped steadily and when negative in 2008. Gold ran from $300 an ounce to more than $1000 over that period.

In 2008, interest rates plummeted but inflation dropped even faster. As a result, the real interest rate turned sharply positive. Gold prices dropped from more than $1,000 to less than $800 over that time.

Then, after the Federal Reserve committed to Quantitative Easing and inflation started to rise and interest rates fell, the real rate of interest went negative again. Gold soared to $1900 an ounce because of it.

The pattern is pretty clear here. Pretty much undeniable.

Anyone looking at these charts would see that real interest rates are the most important factor driving gold prices over the long-term.

And that’s the key starting point for everything related to gold.

Gold’s Next Move

Now that you know the single most important driver of gold prices, you just have to do three simple things.

First, forget about 99% of what you read about gold. The stories of surging demand and “lines around the block” will come and go. They don’t matter.

You’ve seen the proof they don’t.

Second, look at interest rates. The economy is in a tough spot. With little demand for borrowing, interest rates should stay low. Low interest rates are here to stay for the foreseeable future.

Third, watch inflation. It rising is one of the surest bets in tha market today. Inflation rose conistently over the last 100 years. It will keep going up next year and beyond.

The combination of all this means this gold bull market could have some legs.

It won’t be straight up surely. Nothing is. Gold prices will probably not even set new all-time highs this year. They’d have to go up another 40% just to get there.

At this point though, even 10% to 20% increase in gold prices could make a fortune for gold investors in the next few months.

Later this week I’ll show why that is and precisely what to do about it now.

2 Comments

  1. I believe that, being a monetary metal that is priced mostly in US Dollars, gold is more directly tied to the Dollar Index than it is to interest rates. All you need to do is compare the charts of gold and the Dollar and you will see the connection. However, there is a small ring of truth to what Mr. Micky said here because interest rates are often the driver of currency movements. Also note that during the beginning of the last bull market in gold (that went from 2001 to 2011), the Dollar made a new high in 2001 while gold refused to make a new low, thereby creating a divergence/non-confirmation. Similarly, while gold was making new highs in 2009, 2010 and 2011 the Dollar did not confirm, creating another important non-confirmation. So be on the lookout for such a divergence in the near future. Also be aware that the gold/silver ratio is extremely high right now and is in the territory where previous bull markets have begun in the metals. And that also means that silver will be appreciating at a higher rate than gold during the next bull market.

Leave a Reply

Your email address will not be published. Required fields are marked *

Post comment