Fact: Rising Rates Could Signal Higher Gold and Silver Prices

by David EngstromNovember 18, 2014

Today, as gold and silver prices still trade well below their reported cost of production, experts from everywhere are weighing in on reasons why.  Some say it’s because QE3 ended, proving the economy is growing.  Others say, it is because stocks are up and the fear trade no longer exists.  Still others point to the Fed and its promise to keep interest rates near zero for a longer period of time.

What I did not hear from any mainstreamers is that now is a great time to buy gold and silver on the dips.  When stocks go down we hear it all day long.  When gold and silver go down we just hear mouthfuls of disdain for the metals and their future.  I did hear reference to one positive comment on gold.  It was a mockery of Alan Greenspan when he said, “Gold is a good place to put money these days given its value as a currency outside of the policies conducted by governments.”  Not even the most respected banker in the history of the world can polish gold’s reputation of late.

Maybe now is a good time to regain a perspective on why anyone owns gold and silver at all.  Generally, those who own, do so for one of two reasons.  First, to be diversified and protected against financial disaster.  And secondly, in the event an economy overheats and inflation takes hold, gold and silver are the consensus hedge against loss of purchasing power.  You own it for protection and to allay fear of losing wealth.

Within this context, it is entirely appropriate to keep citizens apprised of facts related to the economy, stocks, debt, inflation, etc.  There has never been a perfect economy.  There has never been financial utopia.  There has never been a reason not to diversify your investments.  There has always been and will always be forces working against the “99 Percenters”.   It’s not just cliché to say the rich keep getting richer and the poor keep getting poorer.  It is said because it is true.  So, why do some choose to work so hard to discredit gold and silver along with those who proclaim their virtues, when it is banks and the “One Percenters” who own most of the world gold supply?  When did common sense turn to nonsense?

That said, it is clear you just don’t get the news you need from mainstream media and those who continue their vigil over impending crises are mocked as jokesters crying wolf.  We all know how the story of the shepherd boy who cried wolf ended.  The wolf did come, the villagers ignored the cry and the sheep were scattered.  One could lay blame on the shepherd boy for not taking his job serious.  But it was the Villagers who ultimately ignored the facts.  The fact was, there were wolves roaming the hills trying to eat their sheep.  They knew the threat was real but chose to ignore the warning.  

Following are facts being ignored today:

Fact:  We were close to economic Armageddon once and it hit us from the blind side. 

Fact:  So blind were the media and so absent were any warnings, we were just minutes away from total economic collapse. 

Fact:  And here we go again.  Debt is 80% higher than it was when the last crisis struck and somehow, the debt threat no longer exists.

If there were ever a warning that should be shouted from the hills today, it is that of higher interest rates.  Do you really believe interest rates can stay this low forever?  Interest rates are the new can being kicked down the road.  A few words from the Fed have us believing they never have to go up.  If they never have to go up why were they ever higher to begin with?  Don’t be naïve.  It’s not if interest rates are going to rise it’s when.  Some believe the Fed has total power over interest rates.  It decides when and how much.  Not so fast! 

Fact:  The markets have as much control over interest rates as the Fed.  Maybe more. 

On July 15, 2012 the Ten Year Treasury yield dipped to 1.46%.  By December 23, 2013, the yield jumped to 3.006%.  What was the Fed Funds rate in 2012 and 2013?  It was 00.00% - 00.25%.  It’s been that rate since January 2009.  Today the 10-Year trades at about 2.32%. 

Fact:  A move back to 3% is possible regardless of Fed actions.  

A move back to just 3% would amount to a 30% increase in interest rates.  That alone could have a devastating effect on the markets, our budget deficit and the economy.  It could be 2008 all over again.  Let me illustrate.

Today, the majority of our budget is dedicated to the payment of interest.  I know you hear that interest on our debt is only about $260 billion dollars.  And, you hear our national debt is closing in on $18 trillion.  The truth is . . .

Fact:  Our real national debt is about $115.4 trillion and our annual interest payments are $2.19 trillion and rising. 

You see, when the mainstream talks about debt and the interest we pay to service that debt, they leave out “Unfunded Liabilities.”  What are social security payments if they are not interest payments?  Money was taken from us, put into a giant pool of expertly managed accounts and will be paid back to us upon retirement.  It’s flat out interest on what is owed to millions of retirees.  The same can be said for Medicaid, Medicare and Federal Pension Payments.  These are all payments against unfunded liabilities.  Unfunded by the way, means money that was taken but has been spent on something else.  It’s gone!

The total of payments against those liabilities today is $2.19 trillion dollars a year and rising.  (Some estimates vary.  For purposes of this writing I have used the lesser value) The total of revenue (taxes)  collected by the government is just over $3 trillion. 

Fact:  Fully two-thirds of every dime collected in taxes goes to pay interest on debt.  [Visit www.usdebtclock.org to confirm these numbers] 

The fed currently has interest rates near zero but some say we should welcome more normal rates of 5 or 6%.  With many lending rates currently between 3 and 4%, (assuming you can qualify) that means rates would have to rise about 2% to normalize in the minds of some. 

Scary Fact:  If interest rates on the 10 year rise just .68% back to 3%, dragging other rates along with it, that could increase interest payments on the real $115.4 trillion of debt by $784 billion.  

At that point, the total of interest payments that must be paid each year approaches $3 trillion.  With tax revenues barely above $3 trillion annually, we approach the time when we have to borrow money just to pay the interest on our debt.  The snake begins to eat its own tail.  The effects could devastate the economy and the markets.

Whether you think this is some joke or another cry wolf, the fact remains.  Interest rates have nowhere to go but up.  The Fed cannot cut rates lower than zero.  Keep this in mind next time you witness the parade of experts who would discourage an investment into gold or silver and spew claims of record high after record high in stocks.

Here’s one more fact to consider.  No one has ever been wiped out by diversifying a small portion of their portfolio into gold or silver.  If the markets are strong, your portfolio rises.  If the markets are weak gold and silver help protect your wealth.

As always, this article is laced with my opinions but riddled with facts.  If you share any of my opinions and appreciate the facts I would be honored to have you follow me @DaveTheGoldDr.

 

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