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The Golden Lie

Written By Christian DeHaemer

Posted November 17, 2011

I’ve been in this business for a long time, and I’ve heard a lot of nonsense.

The most nonsense I hear comes spewing from the pie-holes of gold bugs.

Gold bugs are a curious and crusty breed produced in vast polyester hoards in the 1970s. They jumped on the malleable metal when Nixon disconnected gold from the dollar. They rode the metal all the way up into the eighties…

When gold hit $1,000 an ounce, they shook out their long locks and said it was going to $2,000!

But alas, the price fell — and kept falling for almost 20 years.

The gold bugs will tell you that gold is the ultimate storehouse of wealth, that you can buy a good suit with an ounce of gold just like a senator in Rome could buy a nice toga. They bring up the nouveau riche Chinese or the Indian wedding season.

All of that is poppycock.

Real Interest Rates

There is only one reason to buy gold, and that’s because you can’t make any money from bonds.

Gold is directly linked to real interest rates.

Take a look at this chart:


When real interest rates are negative, gold goes up. Simple.

The definition of real interest rate is an interest rate that has been adjusted to remove the effects of inflation. This reveals the real yield to the lender.

The real interest rate of an investment is calculated as the amount by which the nominal interest rate is higher than the inflation rate.

The problem is that right now, the yield you get from a Treasury is 0.25% — or essentially nothing.

The government is reporting through the Consumer Price Index that inflation is now running at 3.87%. Some people think it’s a lot higher than that. Certainly the price of turkeys and stuffing has gone up…

The Upshot

The smart investor can only conclude that until the bond market can return a higher rate of return than inflation, there is no reason to own bonds.

If inflation is going to destroy your wealth, you might as well own gold.

After all, gold can’t default.

If you understand any investment strategy, you should understand this one:

Buy and hold gold until real interest rates are positive.


Christian DeHaemer
Editor, Wealth Daily