Real Interest Rates Over the Years

There’s an interview piece coming out at Seeking Alpha sometime in the next few days on the subject of “Positioning for 2013″ and, during the discussion, the subject of inflation and real interest rates in relation to the gold price came up. Here’s a chart that explains much of the current gold bull market:

As should be clear from above, it’s not the absolute level of inflation or interest rates that really matters - it’s the relative level of the two. It just so happens that average real interest rates over the last ten years have been almost exactly the same as they were in the mid- to late-1970s - about -1 percent - that culminated with the spectacular blow off top in early 1980 under Fed Chairman Paul Volcker. The gold price then declined for the next 20 years while real interest rates were positive, averaging about 4 percent.

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3 Responses to Real Interest Rates Over the Years

  1. Pool Shark December 28, 2012 at 7:45 AM #

    This is precisely why gold will continue to do well into the foreseeable future. When real interest rates are negative, gold (which pays no interest) has no carrying costs.
    When the next Paul Volcker raises interest rates back to historical averages, it will be time to sell your gold, but given what higher interest rates would do to the federal budget; don’t expect this to happen anytime soon…

  2. Tim December 28, 2012 at 7:51 AM #

    This is pretty good:

    Top Ten Reasons Why Fiat Currency Is Superior To Gold (Or Silver) Money

    • Pool Shark December 28, 2012 at 9:33 AM #

      Hilarious article Tim; especially liked the term: “PaperBug.”

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