Since the crash of 2008 the mantra of the western worlds central banks has been to fear deflation. Keep interest rates at near zero or in some cases negative and Joe Public will spend his every last dime to keep the economy going. And why not? Nothing to gain from saving so buy, buy, buy! And as for encouraging the stock market, what better way of keeping the mirage of a healthy economy than cheap money to boost stock prices.
Borrow at Your Peril
Real interest rates are measured by the rate of inflation deducted from the interest earned through savings or dividend yielding investments. Actually the experience has been since the crash that inflation has dithered between a half percent and nearing two percent with the central banks targeting two percent, together with acceptable employment figures, to raise rates.
But hang on, if for example, inflation is just one percent and interest rates are only half a percent then Joe Public is losing money, call it purchasing power, at the rate of half a percent.
Now we all know from experience that increased costs for the necessities of life, food, heating, have risen by more than two percent per annum since 2008 despite the figures given us by government and now it looks like annual inflation is set to move on upwards from the magical two percent.
In answer the Fed has given a boost to interest rates of another quarter of a percent. Leaving poor old Joe Public losing at least one and a half percent purchasing power on any savings he may be tempted to make.
But at these interest rates why not borrow and spend now before the price of those things you think you need keeps going up. ‘Never a borrower or a lender be’ has never been so out of fashion.
The banks love it and poor old Joe sinks ever deeper in debt. Sooner or later interest rates will have to go up in order to check spiralling inflation. That inflation will be the result of the money printing activities of the central banks. Then Joe is really in the soup with dire consequences too worrying to contemplate.
Every Spare Dollar Goes Into Gold
Meanwhile those of us that consider ourselves gold buffs will continue to put every spare dollar, euro, or pound into gold and silver in the belief that history will repeat itself.
Since 2000, when gold sank to $250/oz thanks in large part to the ineptitude of Britain’s socialist Chancellor of the Exchequer, Gordon Brown followed by a rise to $1000/oz by 2008, also a time of considerable inflation, followed by a drop to circa $700/oz as all asset prices also fell.
Gold went on to hit $1900/oz by 2011 as the era of QE gathered momentum. Then as cheap credit became more readily available money pursued stocks and bonds leaving gold and silver in the doldrums around $1050/oz by early 2016. Since then it has see sawed between $1120/oz and $1365/oz. Today it is back on an up trend at $1255/oz.
Protect Your Spending Power, Maintain Your Living Standards
Why? Gold is priced in US dollars. Rule of thumb in the last few years has been dollar up gold down, dollar down gold up, right now the dollar is showing signs of weakness. There are other factors at play.
Gold (and silver) annual production down, China, Russia and India gobbling up the metal, Germany wanting its gold back, and a possible break down in the gold futures market where the paper contracts far outweigh the ability to deliver.
We could elaborate and go on but serious thinkers will follow up on our comments. In the meantime the statistical picture is suggesting a marked long term up trend.
- One blot on the horizon is the chance that deflation is yet to be dead and buried, meaning a downturn in gold could occur but if this happens it would be a ‘golden opportunity’ to stock up on the yellow metal.
- The other is governments, the Fed, ECB et al attempting to manipulate the price, if so the Chinese will soon put a stop to that to their own benefit.
Long term it looks increasingly like gold will be a good, if not the only, bet for serious savers to protect their spending power and maintain their standard of living.