Interest Rates Could Get Away from The Fed

Veteran mining analyst John Tumazos commented on his outlook for gold and the markets on January 13 and he said a couple of things I agree with that most market participants don’t see:

First, he said that he ridicules both equity investors who think the Fed controls interest rates or anyone who buys government bonds or US treasuries with interest rates approaching zero. We observe events that suggest 5% or higher for 30-year Treasuries. 

Secondly, John called attention “to the unwillingness or inability of manufacturers to deliver goods.  In other words, excess liquidity will be exacerbated as new supplies of goods may not be delivered or supplies fall.  In our opinion, the current climate resembles the 1973-74 era of Nixon’s wage-and-price controls, where shortages abounded as manufacturers did not produce enough at a cycle peak as they could not raise prices to cover costs. Today wood, steel, auto or others do not raise output either lacking confidence or inputs. Shortages of basic goods are prevalent with steel prices doubled, iron ore prices doubled, scrap steel prices almost tripled, wood prices more than doubled and auto makers cutting output lacking semiconductor chips.

As a mining stock analyst, John uses conservative projections for precious metals prices, which he uses to base present value numbers for the companies he analyzes. For gold, his current longer-term projections are: $1,800 gold for 2021, $1,700 for 2022, $1,725 for 2023, $1,900 for 2030, and $2,150 for 2040 gold. He estimates silver at $22 for 2021-23, $25 for 2024, and $27.50 for 2025, noting that potential growth in solar from 2% to 20% of world electricity could double world silver demand by 2035 or 2040. He said his “greatest gold market downside risk worry involves higher interest rates. At some point, global financial markets will recognize inflation, where it is possible that all asset classes stocks, bonds, commodities, real estate, timber, emerging markets, etc., all plunge in value at higher costs of capital.

In my view, the chances of interest rates getting away from the Fed as they did in the 1970s is very real and in fact as I have mentioned in this letter, Alasdair Macleod pointed out that the 10-Year Treasury rates have already pierced through the golden triangle indicating a secular bull market in rates is underway even in this very weak economy. As the real interest rate declines with inflation, market participants are requiring higher rates, and as the illustration on your right points out, foreign holdings of U.S. dollars are enormous. No wonder foreigners have stopped buying U.S. Treasuries with their negative real rates.    


About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.