Masters Series: Exactly Why Gold Is Up and Will Keep Going Up
Editor's note: Interest rates around the world are in uncharted territory.
For the first time ever, interest rates in Germany, Japan, and Switzerland are negative... meaning you have to pay banks for the privilege of lending them money. Meanwhile, rates in the U.S. remain near historic lows.
Central banks around the world have created an inevitable disaster for the future of paper money. But as True Wealth editor Steve Sjuggerud explains in today's Masters Series essay – originally published on March 15 in our free DailyWealth e-letter – it's great news for gold prices...
Exactly Why Gold Is Up and Will Keep Going Up
Don't make this complicated... The story is simple:
When both gold and paper pay you zero-percent interest, you should prefer gold over paper.
Today, gold pays you zero-percent interest, and so does paper money. So gold is going up. Pretty simple.
Let me show it to you visually...
As the chart below shows, over the long run, investors would rather hold gold than paper when "real" interest rates are negative. And investors would rather hold paper than gold when real interest rates are positive. (Real interest rates are interest rates MINUS inflation.) Take a look:
(Our friend John Doody – the editor of the excellent Gold Stock Analyst newsletter – runs this chart all the time.)
As you can see, in the 1980s and 1990s, gold did nothing. At the same time, real rates were extremely positive... Investors chose paper over gold.
But in the 1970s, and for much of the 2000s, gold performed extremely well. At the same time, real interest rates were mostly negative.
Today, the real interest rate is negative... Short-term interest rates are 0.3%, and inflation is at 1.4%. So you want to own gold.
Today, the situation with negative interest rates has reached an extreme...
"About a third of global government debt is already paying negative interest rates," Rudi Fronk, the CEO of Seabridge Gold, explained to me on the phone earlier this year. "That's nearly $9 trillion worth. Central banks are paying negative interest on their deposits in the eurozone, Japan, and Scandinavia."
In short, in a world of negative interest rates, gold should outperform...
Yes, gold has run up in 2016... but I feel strongly that the move in gold is just getting started...
Nobody is buying... yet. So that helps me think that we are closer to the bottom than the top.
Gold may have peaked around $1,900 per ounce back in 2011... but it took investors until 2013 to give up on gold.
This next chart tells this story... It is a "real money" indicator for us – it is the dollar value of the money in the SPDR Gold Shares Fund (GLD), the main gold exchange-traded fund ("ETF"). Take a look:
You can see that the money in this fund fell from a peak around $80 billion in 2011 to a trough near $20 billion at the end of 2015.
This tells me that investors gave up on gold – that gold finally became extremely hated, particularly in late 2015.
Then, it all changed...
You can see the change in 2016... Investors are getting back into gold again.
We have a perfect setup...
Gold is cheap, down $700 from its highs. It's hated, as everyone gave up after 2013, and nobody is back in yet. Lastly, the uptrend has returned this year. We have everything I want to see in an investment.
Best of all, now is the optimal time to own gold... Remember, when both gold and paper money pay zero-percent interest, investors prefer gold over paper.
Right now, paper money is paying you zero... It's time for people to own gold...
Make sure you get your money there first...
Good investing,
Steve Sjuggerud
Editor's note: It's a great time to own gold. But Steve has found a "secret currency" that's like gold... only better. The last time conditions were this good, this investment returned 665%. Steve recently put together a video presentation explaining the opportunity in more detail. Watch it here.