Gold Prices, Interest Rates and More
Jeffrey Christian: Good Morning! It’s Jeffrey Christian coming to you from Monex. Several topics that we want to talk about. We’ve come out with our March Report for Monex and we’ve focused on some key issues. Our views are perhaps a little bit different from the mainstream financial market consensus right now. The biggest issue really facing precious metals and other financial assets has been and continues to be the recent increase in interest rates. Looking at the 10-year T-bond, which is really the bellwether for all markets, we’ve seen an increase from less than 1% nominal rates to about 1.59% and it’s back down to about 1.5% as I’m speaking to you today. That increase has caused gold prices and the prices of a lot of other assets to fall. Stock market has recovered. Gold market is actually starting to recover too as I speak to you too. There’s been some consternation and confusion about what all this means and I’ll tell you what CPM Group’s thinking is. We look at real interest rates, inflation adjusted interest rates, inflation adjusted interest rates are a little bit less than -1%, about -.8%, -.9%. Real interest rates are still negative. You are losing money adjusted for inflation if you put your money into a 10-year T-bond. Nominal rates, as I’ve said, they’ve risen a little bit and they’re coming up. People have been surprised that they had the negative affect that they had on gold and other metals, and commodities, and assets, because they’re still very low. If you look at 1.5% nominal interest rates, that’s the lowest…they’re still at very, very low rates historically.
So, first let’s explain that. There are a lot of investors who look at interest rates based on the levels and 1.5%, 1% interest rates are very low. Very few investors are going to say, “Gee, I can lock in a 1% or 1.5% interest rate with a 10-year T-bond. I don’t need gold,” and then if you adjust it for inflation, it looks that much less attractive. So, there are a lot of investors who say, “I can’t believe that the gold price would fall predicated on such a relatively small move at such a very low historic level.” That’s offset by other investors who use valuation models that are based off of the 10-year T-bond and even the smallest move at the lowest level changes the valuations of all the assets in their computer. So, as the interest rate rises, even it’s at a very low level, even if the increase is relatively small, the computer says, “Ok, if interest rates are 1.5% instead of 1%, you should then lower your value for all other assets, because they have to be cheaper in order to compete with 1.5% instead of 1%.” What we’ve seen over the last month or so is those valuation models hitting the gold market. Longer term investors say, “No, interest rates are still very low and they’re probably going to continue.” CPM Group’s view is yes, that’s right. We expect interest rates to continue to see upward pressure, but the upward pressure will be relatively mild. There are a lot of offsetting pressures that will probably reduce the pace of the increase of interest rates and again we look at real rates, inflation adjusted rates, which continue to be negative, and we expect them to continue to be negative for some time. Historically, it’s taken real interest rates of about 3% or more for interest rates to have a negative effect on investment demand for gold and gold prices. So, it’s when you see real rates of 3% or higher, which means nominal rates of 5% or higher, that you start seeing lower gold prices. I don’t know anyone who expects to see 5% nominal interest rates, 3% real interest rates, in the next three to five years. So, our view is that interest rates are having a short-term affect, but from a longer term perspective they’re not going to be in major headwind for gold prices to continue to rise over the next several years.