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The Simplest Reason Gold Will Soar

By Dr. Steve Sjuggerud
Friday, November 20, 2009

When the bank pays you nothing in interest, gold goes up. And right now, the bank is paying you nothing in interest.
 
Why does gold go up when interest rates are low? It's simple...
 
The knock against owning gold has always been that, unlike cash, it pays no interest... Compound interest is almost irresistible. If you can earn 7% a year on a $10,000 deposit, in 10 years time, it will be worth $20,000. Gold will just sit there like a bump on a log.
 
But every so often, like right now, paper money pays you no interest... and the scales tip in favor of gold.
 
That's the simple version. Let's add one little tiny wrinkle to it, so you can see why gold has become irresistible now...
 
The forecast for inflation in 2010 is around 2%. Yet the Fed is keeping interest rates near zero. So instead of earning nothing in interest at the bank, you're actually LOSING 2% a year to inflation. That's what's REALLY happening – the REAL interest rate at the bank (minus inflation) is NEGATIVE 2%.
 
My longtime friend Porter Stansberry asked me to do a study of what happens when real interest rates are less than zero. The results were astonishing...
 
In short, when real rates are negative, gold soars and stocks stink. And when real rates are positive, gold stinks and stocks soar.
 

Here are the actual results. (Note: These are COMPOUND ANNUAL GAINS.)
 
1973 through 1980
The median real interest rate was -1.15%.
Gold returned +32% per year.
The real return on the S&P 500 was -7% per year (not including dividends).
 
1981 through 2001
The median real interest rate was +2.7%.
Gold returned -3.5% per year.
The real return on the S&P 500 was +7% per year (not including dividends).
 
2002 to today
The median real interest rate was -0.4%.
Gold returned +18.5% per year.
The real return on the S&P 500 was -3% per year (not including dividends).
 
Well, there it is, plain as day. And you can see, these trends persist.
 
In 2010, real rates will be negative. (Bernanke will keep nominal rates near zero... so subtracting inflation will give you a negative real interest rate.) There is essentially no chance for a POSITIVE real interest rate in 2010. Said another way, you WILL lose money in the bank in 2010. Whatever interest you earn won't keep up with inflation.
 
History shows, under that environment, stocks don't do well... and gold soars. There's nothing in sight to end that trend. Trade accordingly.
 
Good investing,
 
Steve




Further Reading:

The Best Simple Gold Indicator Around

The Best Three Gold Coins to Buy Right Now

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THIS IS SILVER'S YEAR

When they close the books on 2009, they'll chalk up a big win for silver vs. gold.

One of the big questions facing the precious-metals buyer is "Should I buy gold or silver?" As we profiled in September, since the bull market in precious metals began in 2001, the answer is, "There isn't much difference in the returns... but silver is much more volatile."

Since the 2001 "kickoff," gold and silver are both up a little over 300%. But as you can see from today's comparison chart, when a solid metals rally gets going, the returns in silver can get extraordinary. Our chart plots the percentage gains in gold (black line) versus silver (blue line). Silver is up nearly 65% this year, while gold is up 30%. The blue line, however, has much bigger peaks and valleys.

Moral of the story: You can make a heck of a lot of money in silver... just be willing to stomach a lot of volatility on the road to riches.

Silver is outperforming gold this year
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