Just How High Are Interest Rates?

We Must Get Real [The Daily Reckoning] April 12, 2023 [WEBSITE]( | [UNSUBSCRIBE]( Just How High Are Interest Rates? - Inflation cools a bit but is still running at high levels… - Real interest rates are actually negative… - Then Jim Rickards shows you why gold hasn’t exploded, but also why it still can… [Secret Gold Back currency RUINING Biden’s plans for a digital dollar?]( There is a secret currency that’s beginning to spread across America. And you only have a limited time to claim one of these “Gold Dollars” for yourself. [Click here for more...]( And since you’ll be getting it as part of an upgrade I want to make to your account… You’ll be receiving one of these “Gold Dollars” as a FREE gift. You just have to watch this short 2 minute video I recorded for you and respond by tonight at midnight. [Click Here Now]( Annapolis, Maryland [Brian Maher] BRIAN MAHER Dear Reader, Reports CNBC: Inflation cooled in March as the Federal Reserve’s interest rate increases showed more impact, the Labor Department reported Wednesday. The consumer price index, a widely followed measure of the costs for goods and services in the U.S. economy, rose 0.1% for the month against a Dow Jones estimate for 0.2%, and 5% from a year ago versus the estimate of 5.1%. Just so. Yet we would remind you that 5% inflation — annualized — is nonetheless handsome. It remains an authentic phenomenon . The Federal Reserve’s own inflationary gold standard is 2%. Meantime, the federal funds rate presently dangles between 4.75%–5%. Thus the official inflation rate and the federal funds rate float in a general equilibrium. The 10-year Treasury note presently yields 3.44% — inflation jogs ahead of it. Yet what about the “real” inflation rate? The “real” interest rate is defined as the nominal interest rate minus the inflation rate. Assume a nominal interest rate of 3%, for example. Further assume that inflation runs to 1%. In this instance we find the real rate is 2% (3 – 1 = 2). Now consider the case before us… We employ as our ruler the 10-year Treasury yield rather than the federal funds rate. It is the bellwether rate. To discover today’s real interest rate, we once again subtract the inflation rate from the nominal rate. What do we find? We find that today’s real interest rate is not 3.44% — but rather negative 1.56% (3.44%-5% = 1.56%). That is, the real rate gutters substantially beneath the nominal rate. We must then conclude that nominal interest rates lack all meaning absent the inflation rate. There is a reason why it is called the real interest rate. It penetrates numerical mists. It scatters statistical fogs. It clarifies. As explains Jim Rickards: Real rates are what determine investment decisions. If you’re an economist or analyst trying to forecast markets based on the impact of rates on the economy, then you need to focus on real rates. A 10-year Treasury bond yielding 7% might reel you in, for example. But what if inflation averaged 8% over the bond’s duration? Inflation would gobble your 7% yield — and a bit more into the bargain. You would require a 9% yield to merely paddle ahead of inflation. Meantime, you may balk at a 10-year Treasury bond yielding 3%. But if inflation runs at 2%… then your 3% Treasury yields you 1%. A slender gain, yes. Yet it is a gain. You escape with your skin — plus a slight amount of fat. Your 3% Treasury… under these terms… infinitely bests a 7% Treasury if inflation runs to 8%. Today’s 3.44% yields tower majestically over the 2020 yields that neared 0.50%. Yet in real terms — in real terms — 2020 yields were greater because inflation had no existence. What about gold? How does gold rate in a negative real rate panorama? Jim Rickards: That's an ideal environment for gold. When one thinks of gold as a monetary asset (as I do), then the price analysis quickly moves to competing forms of money. Gold has no yield. It’s not supposed to because it’s the purest form of money: a kind always accepted and always in demand, but not issued by a bank or broker. A dollar bill doesn’t offer any yield either. When other forms of money have high real yields, gold struggles except to the extent it is held as a precautionary or safe-haven asset. But when other forms of money have… negative real yields (as is the case today), gold shines. And gold can perform even better when the safe-haven aspect is contemporaneous with a high-inflation period that results in negative real yields… A zero yield on gold is actually greater than the negative real yield on notes. We note that gold has trampolined $218 since early March — incidentally. It presently trades at $2,030 the ounce. Yet in August 2020 gold went at $2,069 the ounce. It has pedaled $39 backwards in three years. This, despite delirious inflation rates unseen since the 1970s and severe geopolitical heats, most noticeably in Ukraine. Why hasn’t gold gone skyshooting? Has gold lost its Midas touch? Jim Rickards gives the answers below. Read on. Regards, [Brian Maher] Brian Maher Managing Editor, The Daily Reckoning [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) Editor’s note: Are you starting to feel the pain at the gas pump? Well, Jim Rickards has just detailed his playbook on [how to navigate the recent OPEC cuts.]( It’s something you might want to see. [Click here or the play button below to learn how to profit from Biden’s latest oil blunder.]( [click here for more...]( [Urgent Notice From Paradigm CIO Zach Scheidt!]( [Click here for more...]( AdHi, Zach Scheidt here… I’m the Chief Income Officer at Paradigm Press. With inflation raging (and showing no signs of coming to an end any time soon), almost everyone in America is feeling the pain in a big way. Which is why, several months ago, I set out on a big mission… my goal was to create a complete, step-by-step plan to surviving and beating inflation… one that anyone could take advantage of. Today, after hundreds of hours of research, I’m revealing all of my findings. [Click Here To Learn More]( The Daily Reckoning Presents: Gold prices: It's all about the dollar… ****************************** The Real Reason Gold Hasn’t Exploded By Jim Rickards [Jim Rickards] JIM RICKARDS The world has changed radically in recent years. We’ve had the worst pandemic since 1918, and the third worst in world history. We’ve had a global supply chain breakdown. Inflation has been the worst since the early 1980s, despite the fact that it’s come down since peaking last June. Meanwhile, Europe is experiencing its worst war since the end of World War II. That kinetic war in Ukraine has been accompanied by a financial and economic war between the U.S., the U.K., the EU and Russia that involves extreme financial sanctions, including seizing the central bank reserves of the world’s 11th-largest economy. That financial war and accompanying sanctions disrupted supply chains on top of the disruptions that were already present. They still persist. And the world’s second-largest economy, China, locked down 50 million people in Shanghai and Beijing for months in a hopeless and misguided effort to suppress COVID. (China has finally seemed to learn that the virus goes where it wants). Meanwhile, tensions in the Taiwan Strait are high, with a lot of talk about a potential Chinese invasion or blockade of Taiwan. The list goes on. If gold is the ultimate safe haven for investors and the world has been dangerously unsafe, then the price of gold must have been skyrocketing, right? That’s not the case. Today gold is about $2,030 per ounce after gaining over $200 in the last month (that price fluctuates daily and intraday). That’s still lower than the $2,069 all-time high of Aug. 6, 2020. The bottom line is, gold is lower today than it was three years ago. There have been some spills and thrills along the way including two peaks over $2,000 and several smashes down into the $1,680 range, but always followed by a reversion to a persistent central tendency that hasn’t moved much at all. So, we’re back to the original question. With inflation, shortages, and war all around, why is gold not surging past $3,000 per ounce and making its way to $4,000, $5,000 and beyond? Supply/demand conditions favor higher gold prices. Global production of gold has remained fairly constant for the past seven years. Over the same seven-year period, during a period when global output was flat, central banks increased their official holdings by over 6%. China has added over 1,400 metric tonnes in the past thirteen years (that’s the official number; unofficially they probably own far more). Russia has acquired over 1,500 metric tonnes over that same period. Other large buyers have included Poland, Turkey, Iran, Kazakhstan, Japan, Vietnam and Mexico. Central banks in the Visegard Group (Czech Republic, Hungary, Poland and Slovakia) have also bought gold. What’s curious is that individual investors in the U.S. still seem indifferent to gold as a monetary asset. In theory, central banks are the most knowledgeable about the real condition of the global monetary system. If central banks are buying all the gold they can with hard currency (dollars or euros), it’s not clear what retail investors are waiting for. Of course, central bank holdings are only about 17.5% of total above-ground gold and there is far more demand from bullion investors and for jewelry (a form of wearable wealth). Still, central banks are arguably the most knowledgeable market participants; and their steady increases in gold holdings is meaningful. [BREAKING: Elon Musk Bets Big On One Crypto.]( [Click Here For The Details]( Interest rates also play a supporting role. Many of the directional moves in gold prices over the past three years have been tied to interest rate moves. The correlation is not perfect, but it is strong. The rally in gold prices in late 2020 was tied to a fall in interest rates (yield-to-maturity) on the 10-year U.S. Treasury note from 1.930% on December 19, 2019 to 0.508% on July 31, 2020. Similarly, the fall in gold prices after February 2021 was tied to an increase in interest rates on the 10-year Treasury note from 1.039% on January 2, 2021 to 3.130% on May 2, 2022. Rates are 3.44% as of today. But I believe that interest rates on the 10-year Treasury note will fall again and will continue to fall as global growth weakens. That’s good news for gold investors. Short-term rates have gone up because of Fed policy, but long-term rates will go down because investors see that the Fed will cause a recession. That correlates with higher gold prices. While market supply/demand conditions are favorable for gold, and the overall interest rate environment is also favorable for gold, neither has seemed to have the power needed to push gold sustainably past $2,000. What’s the problem? The real headwind for gold and the main reason gold has struggled to gain traction for the past three years has been the strong dollar. After all, the dollar price of gold is really just the inverse of the strength of the dollar. A weaker dollar means a higher dollar price for gold. A stronger dollar means a lower dollar price for gold. It may seem paradoxical to imagine a strong dollar in the midst of all the inflation we’ve been seeing. But that’s the case. What’s extraordinary over the past three years isn’t that gold hasn’t soared; it’s that gold has held its own in the face of a persistently strong dollar. So that leads to the next question: What’s been behind the strong dollar and what could cause the dollar to suddenly weaken and send gold prices into the stratosphere? The strong dollar has been driven by a demand for dollar-denominated collateral, mostly U.S. Treasury bills, needed as collateral to support leverage on bank balance sheets and in hedge fund derivatives positions. That high-quality collateral has been in short supply. As banks scramble for scarce collateral, they need dollars to pay for the Treasury bills. That fuels dollar demand. The scramble for collateral also speaks to fears of a banking crisis in the wake of SVB’s collapse, weaker economic growth, fears of default, decreasing creditworthiness of borrowers and fear of a global liquidity crisis. We’re not there yet, but we’re getting close with no relief in sight. As weak growth turns into a global recession, a new financial panic will be on the horizon. At that point, the dollar itself may cease to be a safe haven, especially given the aggressive use of sanctions by the U.S. and the desire of major economies such as China, Russia, Turkey, and India to avoid the U.S. dollar system if possible. When this panic hits and the dollar is deemed no longer reliable, the world will turn to gold. Frustration with the sideways movement of gold prices is understandable. But behind the curtain, a new liquidity crisis is brewing. Investors should consider today’s prices a gift and perhaps a last chance to acquire gold at these prices before the real safe haven race begins. Even above $2,000, gold is so cheap right now, it’s practically a steal. Regards, Jim Rickards for The Daily Reckoning [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) P.S. [President Biden just dug his own grave.]( He killed the Keystone XL pipeline project. That project was expected to carry 830,000 barrels per day of Alberta oil sands crude to Nebraska… Shortly after canceling that oil pipeline, [Biden made an already bad energy situation way, way worse.]( He put sanctions on Russia that ultimately strengthened their relationship with China. Then began to freeze all decisions about new federal oil and gas drilling. He did so in an effort to tackle all this silly climate change debate. Forget AOC’s “Green New Deal.” I call it the “Green New Scam.” And the repercussions of these decisions are about to hit America hard in the coming weeks thanks to the recent OPEC+ cuts. I just detailed my summer playbook on how to prepare & profit from Biden’s latest blunder. [Just click here to watch my short presentation now.]( --------------------------------------------------------------- Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) [Brian Maher] [Brian Maher]( is the Daily Reckoning's Managing Editor. Before signing on to Agora Financial, he was an independent researcher and writer who covered economics, politics and international affairs. His work has appeared in the Asia Times and other news outlets around the world. He holds a Master's degree in Defense & Strategic Studies. --------------------------------------------------------------- [Jim Rickards] [James G. Rickards]( is the editor of Strategic Intelligence. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2023 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. 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