Jason Zweig, who a year ago called Gold a “pet rock” is doubling down. He reiterates his belief, albeit a misguided one that Gold is a pet rock and justifies it with the usual anti gold bug propaganda. Unfortunately, Zweig along with many gold-bashers and ironically some gold bugs continue to either neglect Gold’s major fundamental driver or have no clue about it.
Roughly year ago, I wrote my first book, The Coming Renewal of Gold’s Secular Bull Market. Numerous readers and subscribers praised the book for being the best book ever written on the subject of Gold and gold investing. Unlike other present books on the subject my book is not typical gold-bug fluff with $10,000 price targets and such. Readers loved the book because it was based on objective facts that could be verified by real historical data and not opinion and ideology.
It is a fact that the trend is Gold is inversely correlated to real interest. In other words, negative real rates or declining real rates is what drives Gold higher. Conversely, when real interest rates rise (as they did from 2011 to 2015) Gold declines.
Take a look at the chart below in which we plot the real fed funds rate and real 5-year yield. Over the past year both have declined and gone negative. That explains the fundamental change driving the new bull market. (We also highlight the four bad bear markets in Gold during which real rates and real yields increased strongly and/or were strongly positive).
It makes perfect sense. Gold is money and an alternative currency. When short-term bonds, CD’s and savings accounts can earn a positive real return there is no need for Gold and alternative currencies. However, when real rates of return are negative or declining, Gold outperforms as it is now.
Zweig fails to mention anything about the importance of real rates and instead resorts to the typical anti-gold arguments. It is a poor inflation hedge. It is down 35% adjusted for inflation since 1980 (its absolute peak). It didn’t do well for part of 2008. Yada yada yada.
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