What will the price of gold be in 2015, Investors Fear May Be Falling
Tue, Mar 11, 2014
Price Of Gold Over The Next Year
If you’re looking for good gold investment advice, you’re not going to find it too many places.
Take this article on the recent gold price move in the Wall Street Journal.
Excerpted from Red Flag for Gold: Is Fear Fading?:
Gold is the stuff myths are made of.
Among the myths: that it is a store of value, a hedge against inflation or a hard alternative currency.
Its behavior over recent decades suggests that it has been inconsistent in those roles. It has done better as something simpler: a bet on fear.
Gold rose on basic economic fears in the 2000s but fell back starting in 2011 as those fears abated. Now, with fears spreading again about the withdrawal of Federal Reserve stimulus and about global growth, gold has rebounded 11% since mid-December.
Experienced gold analysts are warning clients to be careful: If the fears subside, the price of gold could do the same.
Wrong. Wrong. Wrong.
Gold’s behavior over the last few decades has been exactly consistent with one of its main roles, a hedge against inflation.
Inflation is by definition the expansion of the available money supply.
When the money supply expands, the value of each dollar decreases. That is inflation.
One way central banks get the money supply to expand is through negative real interest rates.
A negative real interest rate is created when interest rates are held artificially low. So low they are below the rate of inflation. Hence the real (after inflation) interest rate is actually negative.
When interest rates are negative, it encourages borrowing. After all, if you can borrow money at 1% and inflation is 2%, the inflation reduces the value of the debt.
As the chart below shows, gold is perfectly correlated with negative real interest rates.
Every major bull run in gold prices has been driven by negative real interest rates.
Every gold bear market correlates perfectly with positive real interest rates.
Granted, there are a lot of myths about gold. But the one thing that is not a myth is gold is a near perfect hedge against the destructive nature of negative real interest rates and accompanying inflation.
The price of gold has been rebounding recently. Not surprisingly, that rebound has correlated with a stock market correction that spooked a lot of investors out of stocks into bonds. That drove up the price of bonds and pushed down their nominal interest rates.
The result – a decline in real interest rates and a spike in gold prices.
Will it last? The only way to tell is watching interest rates and not the Wall Street Journal.
The Group of Big Investors in United States.
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