June 2021 – Gold and Interest Rates!

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.

Gold tracking sideways in $AUD for six years was a trigger for my purchase of some of the rarest coins available to collectors (in my budget range anyway :). I almost missed that ascending triangle chart after having only looked at gold priced in Swiss Francs (my previous home of 18 years) and US dollars. The Aussie dollar losing $.70 cents against a basket of other currencies was the trigger for the rapid gains in gold. HOWEVER, note that the Aussie dollar has bounced back to $.80 cents as confused investors scattered following the scandalous 2020 US Presidential election. Yet gold dropped just over 20% to test the closest zone of support at $2200 AUD before being immediately bid up again. The relationship between gold and money (and the interest it pays) in Australia has undergone a transformation. Gold is now the more popular medium of the two. It reflects the changing role of gold in every consumer market.

Is Gold Money? If Not, Why Buy it?

Is Gold money? Absolutely not. I just want to kill that question off once and for all. If you read any blog that screams at you to buy gold because it will soon become the new global currency backing, walk away! Gold was a straight jacket for the rapidly expanding economies of the 20th Century – it’s why central banks dumped it. A modern economy needs elastic money – the capacity to increase supply when times are tight and withdraw that money when the cycle is swinging to the upside. The problem we have today is professional politicians that cannot be trusted to run a bubble gum machine without going broke. That’s not the fault of any central bank or the monetary system we have in place.

The reason I hold a collection of gold collectable coins is that I wanted easily transferrable wealth that will hold some sort of value for the approaching global trade and currency agreement. Floating currencies are a very recent experiment in 6000 odd years of recorded monetary policy. That’s one issue that needs to be resolved and it will likely be done via a global reserve currency that is not tied to any one nation – not China, not the USA or the Euro. Once you have a globally agreed reserve currency, every nation can return to emitting its own national currency (something the Mediterranean countries desperately need) and conduct monetary policy in respect to a global currency. That’ll make life a heck of a lot easier for global business. That currency future will be digital.

Easily transferrable wealth means that I can go where work is available or even return to Europe should economic conditions become favourable on the continent again.  I am wary of cash-strapped governments, desperate to maintain power, seizing our wealth with such excuses as tax avoidance. For this reason I’ve avoided cash payments for gold bullion. I hold plenty of silver bullion for emergency use should the banking system seize up for a period of time, but that is a small percentage of our wealth. Most importantly, I’m not speculating on million dollar gains. As gold gains in price, the purchasing power of our cash is decreasing in all consumer segments. Food, housing costs and energy costs are going to continue their uptrends. Holding collectable gold compensates that decreased purchasing power and if I need $1000 to pay the bills, it’s easy enough to sell in a  strong bullion market.

A Parting Gift

If you’ve managed to get through this waffle, I offer the following gift. For those who do not know, a sovereign’s gold value is calculated by the following – gold value ($AUD) x .2354. Thus a sovereign this afternoon is worth (via Gold Price) $2416 x .2354 = $568.72. The following 1878 Sydney Shield Sovereign is listed for $700 AUD, which after GST and slabbing costs is a loss for yours truly. The coin is hidden behind the following password – June2021 – first in, best dressed. That’s my two cents worth. Gold has more upside in the big picture, irrespective of where price goes from one day to the next. I’ll hold until interest rate reality returns to balance the present madness. This is a complex subject and if you’d like to discuss aspects in other blog posts, please leave a question or disagreement in the comments section below.

Cheers, Les