Just yesterday, back from a trip south of the border, the radio greeted me with this add from a mortgage company: “As the economy continues to improve, interest rates are going up- lock in your refi now! Call today!” Like cockroaches, these mortgage concerns may very well survive the nuclear winter of higher interest rates. Unlike their customers, I might add. (Unless of course those customers follow my advice and load up the credit card with silver and gold) But I liked the pitch made to people who just got obliterated in real estate that the economy is improving, and that the indicator is higher interest rates. As long as YOU aren’t the one trying to refinance or buy a home when those significantly higher interest rates materialize. Even though I have no published commentary from circa 2005 to prove it, I did not think that real estate prices were going to move lower until interest rates moved higher. Imagine my shock to see home prices fall through the floor ALONG WITH INTEREST RATES. How much lower will real estate prices go once yields start to rally? Or will the FED be able to stop it?
In the last bull market, silver and yields moved higher together
As we enter 2011, increasing attention is being paid to interest rates. Although the rise in 10 year Treasury yields since October has been steep (roughly 2.4% to 3.6%), we are still below percentage levels reached just last spring (4%). But bond bears were encouraged this past fall when the 10 year Treasury did not pierce its December 2008 low of 2.2%. It looks like prices in the bond market are therefore having a hard time moving higher. I imagine that if we can get above the 2008 highs (somewhere in the low 4% range on the yield), then maybe the bond bears can have their way with treasuries.
So what do rising interest rates mean for precious metals investments? A lot has been said regarding the possibility of positive real interest rates driving people out of gold and silver and back into equities or somewhere else. So let me do my best to dismiss these concerns, to disarm one more imagined, supposed landmine deterring people from maintaining and holding their positions in real money. Please take a look at the chart below. Focus on the period from 1940 to 1980, and ask yourself what you believe is being depicted here:
You may have figured out from the Federal Reserve logo that the chart depicts interest rates from 1940 to 1980, a move from 3% to 15%, give or take. But the depiction could just as easily have been a chart of the price of silver over those same forty years, where the price went from roughly 40 cents in the early 1940s to 50 dollars in 1980. Uncanny, no? So the next time someone tells you that rising interest rates are going to kill silver (or gold), please tell them- with all due respect of course- to buzz off.
Controlled Demolition of Bank Deposits
Part of my skepticism, though, regarding a quick end to the nominal bond bull market comes from the numerous observations of men like Rob Kirby and Jim Willie regarding the role played by the Fed and allied banks in supporting low interest rates for American deficit financing. Both Kirby and Willie maintain that under a fiat currency, dollar-reserve standard, it is already possible for the U.S. government and banks to keep all interest rates as low as they want, due to the sheer size and volume of interest rate derivatives (in addition to credit derivatives). According to these observers, there are over 200 trillion dollars of such interest rate derivatives, derivates which, in Willie’s words, “killed off the bond vigilantes.” And so the interests of the U.S. government could not be more diametrically opposed to the interests of average American savers. Kirby and Willie’s concern with interest rate derivatives means that the U.S. power structure is slowly demolishing the real value of bank deposits, while the nominal value of such deposits of course stays the same. Since bank CDs are shorter term versions of a bond, the same argument applies to anyone sitting in bonds at the moment as well. However, the injustice to those sitting in the shortest duration loans is the most egregious. Inflation is already running in the 6-8% category (according to John Williams’ shadowstats.com) and 6-month CD rates are barely over .5%! If this keeps up, within 5 years, at least half of the purchasing power of your CD will be gone! And many (myself included) believe that the cost of real things will only move higher in the years ahead. The Fed is by no means obligated to make the interest on short term deposits or bonds equal to anywhere near real rates of inflation. So please use common sense when thinking about what constitutes inflation. This means turning off the T.V. whenever anyone talks about the C.P.I as the only definition of price inflation.
Regardless, it will be quite a while (beyond certain peoples’ lifetimes?) before savers are enticed by attractive interest rates to stop considering investment alternatives such as tangible assets. As another indication of how far we are from a gold or silver bubble, Niall Ferguson- a favorite historian "superstar" of mine- kind of downplayed the importance of investors holding gold, saying that the best price gains had already been made since 1999. This astonishing statement came from one of the leading scholars of the types of currency/debt debasements, collapses, and imperial mishaps that should be leading people to make big bets in favor of the metals.
Implications of bond market moves for precious metals investors
Please remember too the astonishing fact that the run up in gold and silver so far this decade has occurred in a climate of appreciating nominal long term bond prices, not depreciating ones. This impresses me because of what was depicted in the chart above. How much higher will gold and silver go once the average investor, already burned by stocks, is further scorched by bonds? Or put more accurately, what happens once those investors realize that interest rates are being artificially capped at levels far below what it costs to compensate for exploding rates of inflation. Understand that the great gold and silver bull market of the 1970s was cast against a backdrop of people getting hit in both stocks and bonds. That was when the “fun” (from the crusty goldbug perspective) really began. At this moment, we are actually still missing the real fuel for this gold and silver fire. The fuel provided by people giving up on longer term paper investments of all kinds and heading for the higher ground offered by the only types of money used for thousands of years: silver and gold.
"Precious Metals" really should be called "extremely scarce metals"
On a final note, David Morgan, Ted Butler, and John Embry are reporting an amazingly tight physical market in silver. Embry recently announced how the Sprott Physical Silver Trust has not even received all of the silver that it purchased over 3 months ago. And yet the SLV ETF continues to somehow increase its physical “holdings”?? Don’t worry, there are a line of lawsuits waiting to be filed regarding the owners of the ETF for having used these vehicles for paper price supression.
Your humble writer reports that it was impossible to purchase Mexican silver coins at several currency exchange houses in Mexico City last week. Believe it or not, you used to be able to walk in and exchange your extra pesos for silver coins. But this time around, no bueno. The delivery man must have been late or something….
What it all boils down to is this: there is no substitute for physical silver, especially if you suspect, as I do, that the next great Wall Street scandal coming down the pike will involve the white metal.
