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Strategies & Market Trends : Commodities - The Coming Bull Market -- Ignore unavailable to you. Want to Upgrade?

To: craig crawford who wrote (586)	7/23/2001 5:09:52 AM
From: craig crawford	Respond to of 1643

Real Rates and Gold (long article) gold-eagle.com "The Fed's attempts to stimulate the economy during the 1970s through what amounted to a policy of extremely low real interest rates led to steadily rising inflation that was finally checked at great cost during the 1980s." - Bharat Trehan, Federal Reserve Bank of San Francisco Weekly Letter, November 5, 1993 Recently a friend sent me a fascinating Federal Reserve study on real interest rates from which our opening quote is drawn. It provides some ominous insights into the tremendously detrimental effects of low or negative real interest rates, which the study claims create a vicious circle of accelerating inflation. Although discussing events of the 1970s and early 1980s, the report rings eerily familiar and could easily be describing the current ultra-high risk Greenspan Gambit the Fed has boldly embarked upon in 2001. .............................................................................................................................. As we all instinctively know, inflation is a bad thing. Unfortunately, in this extraordinary age of deception in which we live, most people have been brainwashed into believing that rising prices cause inflation. Watch any mainstream financial news program or read a newspaper and whenever inflation is discussed the implicit assumption is virtually always made that as long as consumer prices are not rising, then there is no inflation. This mistaken notion is yet another fanciful component of the complex "New Era" mythology. Historically and properly, inflation is truly defined as an increase in the money supply. When central banks like the Federal Reserve throw discipline to the wind and create fiat currencies at rates exceeding the growth rate of their economies, inflation is the inevitable result. Inflation is solely a monetary phenomenon caused by relatively more fiat dollars chasing relatively fewer goods and services in an economy. Even Noah Webster's massive benchmark dictionary defines inflation as an increasing money supply that CAUSES an increase in prices. Rising general price levels are simply a symptom of excessive money supply growth, the actual inflation itself is perpetrated by central banks running printing presses. ........................................................................................................................... Since money supply expansion is the root cause of inflation, we are firmly entrenched in that camp and believe aggregate monetary growth is the best measure of the inflation rate. For the US in the first six months of 2001, the narrow MZM money supply exploded at an 18.7% annualized rate and the broad M3 ballooned by 11.3% annualized. .......................................................................................................................... From a broad strategic perspective, the first thing that immediately leaps out of this graph is that the greatest gold bull market in modern history roared to the heavens during the surreal period of negative real interest rates that marred the 1970s. Note that the gold market left the launching pad soon after real interest rates made an initial spike below zero, marked by the white arrows above. The gold rally did not end until the Federal Reserve under Paul Volker frantically raised interest rates to third world heights in the early 1980s to combat double-digit inflation in the United States that arose as a result of undisciplined fiat currency growth in the 1970s. Volker had to administer bitter medicine to atone for past Federal Reserve sins. The most important nugget of information to glean from this strategic initial graph is to realize that gold has rallied dramatically when real interest rates were pushed negative by the Federal Reserve and gold has fallen from grace when real interest rates remained high enough to provide a fair rate of return for debt-market investors (creditors). Although correlation does not necessarily imply causation, a very strong case can be made that large amounts of money are poured into gold when plummeting real rates of return make traditional conservative debt investments a losing proposition. Elite bond players pack their bags and move their capital elsewhere when central banks attempt to dishonestly expropriate their wealth through excessive inflation. ............................................................................................................................... If Greenspan and crew manage to inflate us into a 1970s type scenario with dizzyingly rapid money supply growth, raging inflation, and negative real interest rates, the probability is quite high in light of this historical data that gold will kick off a major multi-year rally as savers of capital buy gold to preserve and enhance their wealth and prevent the ongoing promiscuous debasement of the US dollar by the Fed from destroying their scarce and valuable real capital. ......................................................................................................................... This graph also finally brings us to the most provocative data point of the whole essay. Marked by the second white arrow, real interest rates have once again hemorrhaged dramatically in the wake of the Greenspan Gambit series of interest rate cuts in 2001. If you scroll back up and scan the big strategic overview graph, it becomes readily apparent that this precipitous decline in real interest rates in the first half of this year is the steepest slide from normal positive levels since the mid-1970s. The 1970s slide in real rates, as we discussed above, marked the beginning of the biggest gold bull in modern history. It was truly spectacular and legendary profits were won. Are we seeing a similar setup now?