Let me tell you about my friend Chris.
He’s done everything right his whole life.
He took the safe route like you’re supposed to do.
He studied accounting.
Judging by demand for his services, he’s quite a good one.
When he got his first job in accounting, he immediately started night school to get his masters degree.
He’s responsible with his money.
He saves a good part of his income. Far more than the minimum.
He’s a very conservative investor too.
When we talks stocks he talks Google and Verizon and “speculates” in Facebook. Your editor talks gold mining, machine learning, and (used to talk) biotech stocks.
The one mistake I believe he’s making -- that will eventually cost him the most money -- should be his safest move of all.
He’s keeping a sizeable portion of his cash in a savings account.
A few days ago, I think I’ve finally figured out how to explain what makes a savings account the worst possible place to have money…
Read: all risk and no reward.
This explanation really sunk in too and has far greater implications for savers and investors in the months and years ahead.
Not Just For Crazy People Anymore
My friend’s situation is something I’m sure you and many people you know find yourselves in.
The average rate on a savings account is 0.54% according to bankrate.com.
Many banks are much lower.
Inflation, meanwhile, is officially at 0.7% according to the Bureau of Labor Statistics.
If you follows ShadowStats.com though, which uses the old method of calculating inflation before the government changed the formula, real-world inflation is running at more than 4% a year.
As a result, his savings are losing their value at a rate of around 3% to 4% per year.
Investments don’t get much worse than that...it’s the all risk/no reward mentioned above.
And it’s all precisely why gold is becoming and will increasingly be an alternative.
You see, gold has zero yield.
You don’t collect any interest by holding gold.
So gold is usually a terrible store of savings.
In normal times, when you could get 3% or as high as 6% from savings, the opportunity cost of owning gold was pretty high.
However, when real interest rates are negative, like they are now, gold is a much better deal.
Instead of losing 3% or 4% a year because of inflation, you break even.
These simple fundamentals show up in the performance of gold prices too.
The chart below compares the real interest rate to the price of gold:
As you can see, there’s a near perfect correlation between the two.
That’s why today, gold is better than savings in a bank.
And given slumping growth and a Fed unwilling to risk raise rates, interest rates aren’t likely to go up significantly anytime soon making gold a much better deal than savings in a bank.
“Wake Up Sheeple!!!”
This explanation worked for Chris.
It’s much more reasonable than many cases made for gold out there.
It doesn’t have anything to do with government deficits, government debt loads, unfunded liabilities, or anything else which will have a long-term negative impact on the value of the dollar.
There’s also no element of a giant conspiracy to destroy the middle class which can be made by reasonable people and the “Wake Up Sheeple” crowd too.
And after that explanation you just read, he’s recently become one of the thousands of investors stepping into gold.
He’s doing it for quite rational reasons.
He’s not buying gold to get rich.
He’s buying gold to not get poor.
As more people realize what’s going on and do likewise, they’ll propel the gold bull market into a full on bubble eventually.