The fundamentals overwhelmingly point to higher prices for gold, silver, and miners. Here are 3 reasons why:
#1. Inflation Is Soaring
Last year, the money supply soared thanks to massive quantitative easing from the Federal Reserve and enormous government spending:
Unsurprisingly, consumer price index numbers are soaring as well. May’s numbers show a 5% headline number (highest since August 2008) and the core inflation rate is the sharpest rise in nearly three decades.
Meanwhile, government spending is unlikely to slow anytime soon as the government continues to:
- invest aggressively in naval and aerospace hardware and technology in order to win the new space race and maintain stability in the Asia-Pacific
- compete with China for A.I. supremacy
- support continued COVID-19 economic aid packages and
- invest aggressively in infrastructure.
Given that whenever inflation has exceeded 2% over the past decade, gold has risen – this is a bullish indicator for gold, silver, and miners.
#2. Real Interest Rates Are Negative
While the CPI was at a whopping 5% in May, long-term U.S. interest rates remain well below 2%:
That means that the real interest rate based on the 5% CPI increase is a whopping -3.38%…[and] whenever the real interest rate was negative over the past decade, gold was up significantly every time.
#3. Real Interest Rates Will Remain Negative
…Gold’s, silver’s, and miners’ latest sell-off is being sparked by new language from the Federal Reserve that indicates they may be raising interest rates sooner than previously advertised…
Macroeconomic conditions are such that real interest rates must remain negative…as U.S. government and corporate debt are each at their highest levels in history and continuing to rise with no end in sight…
- If interest rates were to rise meaningfully, that would cause a massive economic contraction as companies would have to sharply tighten their belts and halt growth investments. This would have to be done in order to pay down debt to compensate for the higher interest expense while also reacting to the fact that many current investments would no longer be sufficiently profitable to compensate for the risk being taken on.
- Furthermore, the government would have to dramatically cut spending, potentially leading to massive layoffs and almost certainly reduced stimulus, which in turn would harm consumer demand and the unemployment rate…
- the political cost of cutting spending would be unbearable for either political party, making it untenable. As a result, we expect both parties to work together to employ every tool in their collective kits to prevent this scenario from taking place.
- Last, but not least, interest rates will remain low, leading to negative real interest rates because the stock market is currently being propped up by historically low interest rates and a sudden rise in interest rates would cause a market crash.
If CPI remains between 4%-5% or goes even higher, interest rates would need to triple or quadruple from current levels to move real interest rates into positive territory. That would cause:
- a massive bond market and stock market crash that would raise the cost of capital so dramatically that it would cause our massive debt-fueled bubble to burst and would, in turn, cause
- the U.S. government’s budget to blow up with the loss in tax revenue combined with dramatically higher interest expense, virtually forcing it to choose between politically suicidal spending slashes or even more disastrous hyperinflation. In either scenario: hyperinflation or political unrest, gold, silver, and miners are likely to be big winners, especially relative to the stock and bond markets.
Given the soaring inflation, negative interest rates, and strong long-term fundamental outlook for precious metals, it is time to buy gold, silver, and miners hand over fist.
Editor’s Note: The above version of the original article by Samuel Smith, has been edited ([ ]) and abridged (…) for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.
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