Watch ‘Real’ Interest Rates for a Clue

By Jay Taylor
Jay Taylor Media

Jay Taylor
Jay Taylor

As I was driving back from a visit to my family in Ohio, one market pro was voicing concerns on Bloomberg Radio that the Fed is in danger of “falling behind the curve,” as happened in the 1970s when the inflation rate began to rise dramatically and when the price of gold shot up to a climactic $850 by January 1980 from a little over $100 in 1978.

At that time I was a young man who was very interested in what was going to happen after Nixon caused the U.S. to default on its promise to convert dollars into gold, and it was at that time that I declared myself an unapologetic “gold bug.” To me this looks like “déjà vu all over again!” I recall how hard-money advocates were concerned about inflation but the likes Fed chairmen Arthur Burns and G. William Miller and other Wall Street thieves were putting out propaganda up until late 1979, saying that inflation was well contained as they continued to create more fraudulent dollars out of nothing at a faster and faster pace.

priceFinally interest rates began to rise and pick up steam at an exponential rate of speed. But rising even faster than nominal interest rates were was the CPI, which meant that real interest rates were actually declining. As people began to realize that their dollar’s purchasing power was declining big time, they began to look for ways to protect their wealth by trashing dollars and buying tangible assets, most logical of which were gold and silver. Gold rose to $850 from $35 at the start of the decade and silver rose from around $2 to $50. The evidence of the correlation of higher gold prices with a decline in “real” interest rates is shown on the chart above, again thanks to Dan Oliver, with whom I will be talking on my radio show next week.

Much has changed since the 1970s and I agree with Dan Oliver that the devastation in the financial markets is much, much worse now than it was then. What has not changed is that government is lying to us now just as they did then, except that the lies — like Pinocchio’s nose — are growing larger and bolder in order to explain their obvious past failures.

For example, at least the CPI during the 1980s was a closer approximation to the cost of living. Government has used substitution and hedonic pricing to obscure the real cost of staying alive (feeding a family of four, as they said in the 1960s). Rick Rule noted that the Motel 6 he drives by on his way to the office was named “Motel 6” when it first went into business because they charged $6 per night for a bare-bones basic room. Rick said he thinks the cost of living is more like 5% or 6%, which means the government is picking our pocket on a 2% 10-Year U.S. Treasury yield by 3% or 4% per year! But most people seem to believe the government’s contrived 2% inflation rate, and so the con game at least has Wall Street believing there is no serious inflation rate. Actually the work of economist John Williams suggests the cost of living in America is 8% or 9%. What we know for sure is that the Bureau of Labor Statistics has rigged the CPI to a lower number than it actually is, if the question is “what does it cost to keep a family of four alive?”

I am totally convinced that the behavior of certain major players in thinly traded gold markets is, as Rick Rule suggested, geared to encouraging other market participants to act in a way that serves those major players in their own best interests. Rick didn’t name names, but I will tell you that there are only a couple of major banking interests that have the firepower to slam the price of gold down at just the right moment to convince 99% of Wall Street — and thus most Americans —that there actually isn’t any inflation problem.

While there was certainly gold market manipulation in the 1970s (the London Gold Pool in the late ’60s) I believe U.S. Government and Wall Street Wolves, like Robert Rubin and Lawrence Summers, as well as Paul Volcker, became very alarmed by the exponential rise in the price of gold during the 1980s and have been fighting as hard to keep that from reoccurring as they have been fighting to keep another Lehman Brothers or 1929 event from taking place again. We know from a paper co-authored by Lawrence Summers that he is completely aware that gold will tend to rise with negative real interest rates. It would be absurd to think other major members of our government and Fed are not aware of the psychological danger to the dollar if a major rise in gold suggested to people they would be much better off exchanging fake money for the real thing! If that happened, the “legalized” counterfeiting by our government and the Fed that is being used to fuel the Anglo-American war and socialist machinery and enrich Wall Street elites would be over!

But at some point in time, Pinocchio’s nose can no longer be hidden, because prices will begin to rise and the credibility the government and the Fed still have will be lost. What will be the trigger that causes this psychological change that makes it mandatory for people to trade in paper money for the real thing? It is impossible to say, but I think the following metaphor used by Jim Rickards in an interview he recently did provides as good an answer as I could give:

“Snow builds up on a mountain and the situation up there gets very unstable. Any seasoned alpinist can look at it and knows it’s an avalanche danger and it’s going to collapse. But it can continue for a very long time. So a snowflake comes along and it lands the wrong way. It starts to disturb a few more snowflakes and it gathers momentum.

“Then it becomes a larger slide and the whole thing comes loose and it crashes down and kills everything in its path. What will the snowflake be? Well, it could be a number of things: It could be a failure to deliver physical gold, the collapse of a bank, a prominent suicide, a geopolitical event or a natural disaster. There are a number of things. But my point is it does not matter because it will happen sooner or later. Meanwhile, I‘m looking at the mountainside, seeing the avalanche danger, seeing how unstable the monetary system is and that’s where the concern should lie.”

There are many things you need to do to prepare for the kind of financial avalanche that Rickards is talking about. But you have to start by being debt free, owning real money while the fake stuff still has purchasing power, and you should make friends with your neighbors and be sure to have life-sustaining supplies on hand.

From an investment point of view, I think Dan Oliver’s notion is that with negative real rates becoming even more negative, the price of gold will rise dramatically such that gold mining profits will surge. Indeed, this is what Bob Hoye has so aptly pointed out. Whether through inflation or deflation, there will be a massive deleveraging and with that will come a bull market of a lifetime for gold mining stocks. We have been through a couple of tough years. It is my firm belief that we are now on the cusp of the beginning of spectacular profits for the gold mining sector.