Gold Up – Interest Rates Down – How Long Can That Continue?

On Tuesday, September 15th I will be teaching a class on the current state of the economy, interest rates, real estate and gold. The three hour class will begin at 6pm and be held in Century City. I will be presenting one of my “back up the truck” investment recommendations that can be entered by both small and large investors. I will also discuss my updated views on the upcoming decline in long term interest rates. Seating is limited and advance registration is required.

For those unable to attend the live class I will be presenting a webinar on Tuesday, September 22nd from 6-8pm. Download the registration form here.

On August 3rd daily subscribers were alerted that a move in gold to $1000 would begin in early September. On Wednesday, September 9th daily subscribers were told that long-term Treasury rates (10-year) would move lower at 10am Thursday and they have declined from 3.45% to 3.30% in the past 24 hours. Is there any other newsletter that has hit as many home runs this year?

Gold and a lack of inflation

Gold’s recent rise has confused many of the “experts” who see the yellow metal as a hedge against inflation. Because we only see the future from our own past experiences many vividly remember the late 1970’s and early 1980’s when gold did rise simultaneously with inflation. Unfortunately history does often repeat but not usually when it is expected and gold’s move to $1000 is more about currency depreciation and uncertainty than future inflation expectations. If gold was only rallying in dollars it would be a sign of inflation in the U.S. but increases in gold versus the Chinese Yuan, Euro, British pound and almost every major currency clearly translate into something much more than inflation. With most countries desperate to quickly stimulate their economies the easiest way has always been through currency depreciation. If you have goods and services that other countries desire a cheaper currency is a relatively painless way to make sure that your prices are the lowest in the world. Currency pricing is often just a simple matter of supply and demand and if a country’s central bank wishes to push down the value of its currency it can print more until supply overwhelms demand. This is an oversimplification but it’s important to note that every currency trades in a pairing to another currency (yen/dollar, euro/yen, ruble/pound, etc.) so every country can’t depreciate at the same time. Theoretically excess creation of a currency will create new inflation but with capacity utilization so far below norm and the velocity of money declining, the chances of an immediate increase in inflation are slim. The best store of value for worldwide investors is gold which holds its purchasing power in both inflation and deflationary environments. Gold is moving higher because investors see all the world central banks rushing to devalue their currencies at the same time and they don’t know which country will arrive at the finish line first (an economic rebound without inflation). Gold has stopped at the “key” $1000 level but should continue its advance soon and arrive at $1300 in 2010. The best play may come versus the Japanese Yen as the country is heavily dependent on exports and has very little natural resources which should put pressure on the currency over the next 12 months.  I will discuss this trade and give entry and exit parameters at next week’s class (9/15) and the webinar (9/22).

Long-Term Rates Move Against the Consensus

Long-term interest rates are headed lower even though everyone is worried about future inflation coming from the high rate of growth in the money supply this year. There is also fear about how the Fed will exit from its quantitative easing policy and the consensus is almost unanimous that rates will be higher in the next 12 months. We only to have to look back to the last six months where it was obvious the economy would not recover quickly from the recession BUT the stock market climbed 50% despite a consistent wall of worry from analysts. Long-term interest rates have entered the most favorable time of the year for a significant decline as history has shown that 75% of the time rates fall in the last quarter of each year. Long-term interest rates are a function of inflationary expectations which are currently low and normal demand and supply of lendable funds. Individuals are hesitant to borrow because of legitimate fears that asset prices have not yet hit bottom. Banks are willing to lend at only very low loan to value percentages out of fear they will require more collateral if asset values continue to decrease and only government guarantees make them more aggressive with rates and terms. Demand for funds is almost non-existent and combined with excess capacity utilization which is keeping wages down there is only one way for rates to move (and surprise the majority) and that is LOWER!

I will spend a great deal of time discussing the direction of interest rates, gold, the economy and other markets at Tuesday’s class. I look forward to seeing you there.