Resource World Magazine

28 www.resourceworld.com D E C E M B E R / J A N U A R Y 2 0 2 0 Speculations by Leonard Melman I believe we are presently witnessing a potentially dangerous anomaly but one which could benefit the world of precious metals. I am referring to the rela- tionship between interest rates and the price of gold. During recent decades, we have three outstanding examples of the price of gold soaring while interest rates (and inflation) were on the rise or were presumed to be ready to move sharply higher in the near future. Gold prices are in US $. From 1971 through 1974, gold rose from around $60/oz to $200/oz – a gain of over 300% – while prevailing interest rates rose from near 7% to 13-14% and inflation also reached the 13-14% area. From 1976 through early 1980, gold rose from barely $100/oz to over $800 as bond rates were exploding upward, eventually reaching 17-18% while price inflation reached an all-time American high of near 20%. And, from 2008-11, gold attained its all- time, historic high above $1,900/oz based on the widely-held expectation that the enormous increases in America's national debt, which began in 2009, would surely lead to rising interest rates in the fore- seeable future – an expectation which ultimately did not materialize. With this history in mind, I noted a recent article by financial writer, Kenton Ralph Toews, which offers evidence to suggest that as we have moved into an era of negative interest rates, a new rela- tionship between those interest rates and gold prices may be taking place, that is, as interest rates decline, the price of gold increases. In a most informative chart which accompanies his article, Toews shows that as the amount of money invested at negative yields increased from $2 trillion in mid-2015 to $12 trillion one year later, the price of gold rose from under $1,100 to almost $1,400 and, simi- larly, as the amount of money invested at negative rates recently rose from $6 tril- lion to over $16 trillion, gold moved from barely $1,200 to over $1,500. Toews then theorizes that since many countries are experiencing economic slowdowns, there is a growing likelihood that the use of negative interest rates will expand and the impact could be very positive for gold as he poses this question: "What would happen if US government debt, and the rest of the world for that matter, all went into negative yielding ter- ritory? If the correlation between negative yielding government debt and the gold price maintains the same relationship, what would that do to the gold price? We'd see gold go over $3,000." He then offers proper disclaimers including, "…'If' is the biggest two let- ter word in the English Language. And, "this is simply an interesting thought experiment." I would suggest that there may be other bases for concluding that negative interest rates could seriously raise the specter of 'unintended consequences' which could then support higher precious metals prices. First, there is the sheer magnitude of the divergence from historic norms sug- gested by the very existence of negative interest rate investments. For about 3,000 years of monetary history, the norm has been "if you want to use my money, you must pay me for the use of those funds." Now we are told that the opposite is true. A change of that magnitude suggests the potential for great difficulties in the inter- national financial system. Next, since few investors will purchase debt that yields little or below nothing, banks and governments are now encoun- tering difficulties in marketing their debt. As a result, central banks are aggressively 'adding liquidity' to their systems by marketing new central bank debt. As an example, the U.S. Federal Reserve added $77.6 billion in liquidity on November 3 and an additional $111.9 billion on November 11. Also, up to the recent past, generous interest rates on highly-rated debt instru- ments allowed insurance companies and pension plans to meet their future obliga- tions in a safe and secure manner but low to negative rates are now forcing them to seek higher returns, frequently leading to a much higher element of market risk. The prestigious Financial Times recently noted, "…Persistently low interest rates are encouraging investors to take dangerous risks in a quest to maintain their finan- cial returns…raising concerns that even the current lackluster performance of the global economy may not be sustainable." Finally, we would offer this warning from former Presidential candidate and noted free enterprise advocate, Ron Paul. "Massive government and private debts put tremendous pressure on the Federal Reserve to keep interest rates low or even to experiment with negative rates. But the Fed can only keep interest rates low for so long without serious consequences." I would add that if they occur, those 'consequences' could dramatically increase the level of global financial concern which, by historic norms, should result in higher future precious metals prices. n This material is taken from sources believed to be reliable and is provided for information only. Any investment decision should be made only after prior consultation with investment professionals. Leonard Melman is a financial and political writer who focuses on issues relat- ing to the resource sector. Mr. Melman lives in Nanoose Bay, British Columbia, Canada and can be reached at lmelman@shaw.ca Gold and Interest Rates

• Cover