As someone who wishes to eventually leave this earth better than what I found it, I have a sincere interest in helping collectors and interested observers understand the end of our present economic cycle at play as I see it. Having spent the past decade reading blogs and then observing outcomes to test the author’s capacity to predict, I’ve cut away a lot of crap information. It permits me to understand more, with less extraneous and wasted reading. Thus today I wish to present a clear and concise chart from Mish, illustrating the relationship between gold and interest rates.
A Very Brief History of Gold and Interest Rates
As this article from the Perth Mint illustrates, gold was not available to ordinary investors until 1976. Although I’ve yet to read the history of Australian controls on gold, the confiscation and devaluation of the US dollar against gold in 1934 is well known to many collectors. That Australia eased these controls in 1976 makes the above chart pertinent, as it begins around the same period. Notice how stagflation (read more on the term here), which entails a narrowing of investment options, led investors to buy gold. However, when Paul Volcker – head of the US Federal Reserve – ratcheted interest rates to nearly 20% to kill the inflation side of stagflation, investors dumped gold and jumped into fixed income. Heck, I wouldn’t look twice at gold coins if 10-15% gains on cash was available from the banks!
From there on, the global economy was on cruise control from the mid-80’s to the Y2K panic in 2000. The recessions in 2002, the GFC of 07/09 and the failings of Europe these past 10 years have all pushed interest rates progressively lower. While Mish is measuring real interest rates in America, Europe’s weakness has been feeding into America’s woes. Australia’s woes began in 2012 as interest rates were cut to reduce capital inflows – likely because of a problem plagued Euro-zone when Greece made headlines. Capital controls on foreign inflows were imposed in 2016, with the Aussie dollar being progressively abandoned from thereon out. The recent low in the Aussie dollar in 2020 will likely be retested and possibly drop to the 2002 low of $.48 cents before this is over. Australia’s long-term interest rates are illustrated below (from Trading Economics):
Has Gold Got any Further Upside?
The answer to that question can be alluded to from the brief overview of interest rates above. Are interest rates going to return to normal anytime soon? Probably not. Why? Because governments in the OECD are now the biggest debtors, sucking credit that pays investors bugger all into unproductive white elephants that won’t expand our economy out of the hole it is in. Any return to interest rate normality will ratchet up their interest payments and impede their capacity to service said debt – same goes for homeowners in Australia. So yes, gold has more upside, especially as the Aussie dollar returns to test the lows of $.50 cents. Let’s take a look at the following chart, which mirrors comments and posts made in Facebook.