The economist John Maynard Keynes is often misquoted when it comes to gold. When he referred to “a barbarous relic,” he was not referring to the precious metal itself but to the Gold Standard under which the global financial system used to operate (this makes sense when we take a second and consider that barbarous means cruel or vicious). Nevertheless, the fact that gold yields nothing means that many people consider it useless.
Yielding zero means that gold becomes relatively more attractive the more that yields of other assets fall. The price of gold sometimes has a relationship with the real yield (U.S. interest rate minus annualized consumer price growth). As the real yield declines, gold often rallies. When the real yield goes negative, gold bugs start to become very excited indeed. But what happens when the real yield becomes extremely negative?
I spotted a version of this chart at the McClellan Financial Publications site, mcoscillator.com. It shows the price of gold versus the U.S. real yield, as measured by the 3-month Treasury Bill rate minus the annualized growth rate in the consumer price index. We can see that when the real yield is negative and still declining, the price of gold has tended to rally. But, as McClellan notes, look what has happened when the real yield has dropped below 3%. That’s when the end has been nigh for the decline in the real yield and the extreme low has coincided, more or less, with a peak in the gold price. With the real yield, on this measurement, at minus 5.3% and the most extremely negative since the 1970s, the probability is high that a low in the real yield is not too far away.
The gold price has already been declining, perhaps anticipating a move back up in the real yield. That move could come about by consumer price inflation collapsing as the Fed thinks (or hopes for!). Alternatively, it might well come about by aggressive Fed tightening as it realizes that it has made an almighty policy mistake in keeping monetary policy uber-loose for too long.
Investing for the long haul?
That’s what financial advisors say is the best way to build wealth.
But timing still matters. A lot.
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The Elliott wave model helps you time these big-picture moments.
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