Negative Real Interest Rates and Gold

Real interest rates are calculated by taking the nominal interest rate minus the inflation rate, which is usually determined from the CPI.  This is a hard subject to dive into because the CPI isn't necessarily the best statistic to use.  In addition, you can use different interest rates based on the length of time.

You can view the current Treasury rates here.  As of this writing, the 30-year yield is 3.18%.  The 10-year yield is 2.01%.  The 1-year yield is .12 %.  The 1-month yield is .03%, which is almost zero.

I think the one-year rate is a good one to use.  At .12%, this is very close to nothing.  You would have to wait hundreds of years just to double your money.  The inflation rate, even using the CPI, is much higher than this.  So in terms of a one-year treasury, the real interest rate is negative.

The crazy thing is that for the tiny bit that you would earn in interest, you would actually have to pay taxes on your gains, thus making the real return that much further below zero.

If you bought a 10-year bond right now, you would earn just over 2% per year.  This is slightly higher than the current CPI numbers show, but there is no guarantee that the price inflation rate would stay the same for 10 years.  You are locked into your bond rate for 10 years.  If the CPI goes to 3% next year, you will then be losing money on your so-called investment.  And again, you would have to pay taxes on the 2% you do earn each year, making your loss even worse.

In addition, there is obviously much debate about the accuracy of the CPI and whether it is a good measure.  I think the CPI is useful in telling us the trends of consumer prices, although nothing is near perfect.  And of course the CPI does not really take into account the increased prices in assets such as stocks and real estate.  But I also acknowledge that using the money supply, such as the adjusted monetary base, has its limitations because it is only one factor in determining consumer prices.

Currently, the CPI is showing an increase of 1.1% over the last year.  Taking the less volatile measure of CPI without food and energy, there is an increase of 1.7% over the last year.

But even when we use the government's more conservative CPI numbers, we are obviously in an environment of negative real interest rates.  As long as this is the case, then I am long-term bullish on gold.

A rise in interest rates might hurt real estate prices, making mortgage payments higher.  But a rise in interest rates does not necessarily hurt gold, unless it is a rise in rates without a commensurate rise in price inflation.  As long as rates and price inflation are going up together, with real interest rates remaining negative, then I see a long-term uptrend for gold.

We will only see a situation of higher interest rates with a lower CPI when the Federal Reserve stops creating new money for a sustained period of time.  I do not see this happening any time soon.