What’s Wrong With Gold? Absolutely Nothing!

Without a doubt, the “real” yields (interest rates less inflation) are perhaps the most important determinant in the dollar price of gold. On your right are four charts that clearly demonstrate the correlation between “real” yields and the price of gold. Interest rates are on the vertical axis and the gold price on the horizontal axis. The Top Chart on the right, covering the period from 1982, when real yields were as high as 9%, to 2007, during which time the average real yield was +3.73%, shows that there was virtually no correlation between real yields and gold. Middle Chart: With QE as a policy response to the financial crisis, the “real” yields slipped to an average of +0.77%. There was a clear correlation as real rates went strongly negative sending gold to a high of $2,000. Bottom Chart: The pandemic policy response, which was to institute a still more aggressive money printing scam that took rates to an even deeper negative territory, has shown an even stronger correlation between lower real rates and gold.

So why is gold not responding positively now?  The answer in my view is because most investors are “drinking the Fed’s “Kool-Aid.” There is no fear now by the Kool-Aid drinkers evidenced by: 1) Record issuance of money losing IPO’s; 2) Mass insurance of SPAC’s; 3) Record margin debt levels; 4) Near-record stock valuations; 5) Retail investors taking on personal debt to invest; 6) Bitcoin and other cryptocurrency investments; and 6) Belief by investors that the Fed will always print more money if the equity market begins any serious decline.  As soon as investors realize the error of their ways, that will change. Unless I’m missing something, there is no reason to think real rates are going to rise anytime soon with Biden’s massive deficits and no foreign countries ready or willing to buy U.S. debt now. Meantime while we wait for the Kool-Aid drinkers to get their fill and gold has its next major run higher, we have a number of very exciting exploration wealth creating stories to tell.

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.