Monday, March 28, 2005

Interest Rates

During this USD rally (correction from going down) it is important to remember the difference between "nominal" interest rates and "real" interest rates, and how they relate to the inflation rate. Currently in the US, a 1 year certificate of deposit from a bank pays a nominal interest rate of about 2 1/2%. Official government inflation rates are about the same. Therefore, the real interest rate on that certificate is 0% if you go by official government inflation rate numbers. US government inflation rate numbers are substantially understated so that the real interest rate from a certificate of deposit is actually substantially negative; not 0%.

Historically, any government fiat token, the USD in this case, is going to trend down when real rates are not about 2% above inflation rates. Currently, the rate at which the US central bank is increasing its rates is low enough so that their rates will not play catch up to real rates. They want a lower dollar despite US Treasury Secretary Snow constantly saying the opposite.

The markets really set interest rates. The US's central bank (the Fed) follows the markets. Current US rates are way too low, especially considering real inflation. The bond and note markets are starting to understand this as the price of bonds and notes are decreasing (which means rising rates) along with the US stock markets; a bad sign when both of these markets go down at the same time which is what has been happening in the last few months. So expect rising interest rates as the USD goes lower since current nominal rates have so much catching up to do to get ahead of real rates. So a weakening USD is good for the USD price of gold since it will take more USD to buy the same amount/weight of gold. And what goes along with a rising price of gold are rising interest rates. Rising USD priced gold/silver along with rising interest rates is normal. Rising rates will not strengthen the USD untill real rates get realistic. If the history of governments and human nature are any guide, there is still a long way to go before the price of gold/silver top out.

By the way:

It looks to me that this correction in gold and silver is over or almost over. Next week should see prices start to move up. Statistically rare is the USD now being up 7 days in a row. Silver being down 7 days in a row. Some silver stocks being down 8 days in a row. And, gold open interest on the Comex exchange being back down to historical lows.

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