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The Only Gold Indicator You NeedBy Dr. Steve SjuggerudWednesday, April 28, 2010 "So… where's the big gold bull market?" I asked John Doody over lunch yesterday.
John writes the excellent Gold Stock Analyst newsletter, where he takes a deep look into gold and the major gold stocks every month. Before starting the newsletter in the early 1990s, John was an economics professor. Right now, John and I are at a conference on Maryland's Eastern Shore.
"John, if gold is so great now, then why hasn't it soared this year?" I asked him. "It's only up like 5%."
John replied. "That's a good question… In my opinion, the primary driver of the gold price is real interest rates that investors earn on their cash."
In short, if investors earn nothing on their cash, then gold goes up. If investors earn high rates of interest on their cash, then gold goes down. As the chart below shows, that's the only gold indicator you need to know.
 Importantly, we're talking about the "real" rate of interest – after inflation. John defines the real interest rate as the interest rate on risk-free 90-day Treasury bills MINUS the inflation rate. That's a good estimate of your "real" return on cash.
As John explained, when the real interest rate is negative – when inflation is higher than risk-free interest – "cash loses purchasing power and buys fewer goods than it bought earlier in the year. When that happens, for protection, investors buy gold and drive its price higher."
Now, take another look at the chart. John explained, "Today's gold bull market and 1970s gold bull market were eras of negative real interest rates. But importantly, for 2010 to date, the real interest rate has been barely negative, as shown by the chart's red-circled area."
With the real interest rate at about 0%, gold isn't moving anywhere. And John pointed out that the Fed rarely raises interest rates as elections approach. So interest rates should stay where they are.
But eventually, John says, "A pickup in the economy will be the key to higher inflation. With the U.S. economy slowly on the mend, we could see inflation. Real interest rates would go negative and gold would rise."
One thing I like about John is, he's not the typical gold bug. He's not taking some moral stand against the government or digging a bunker full of freeze-dried food.
John simply looks at the facts. The facts say you need to own gold when the "real" interest rate is negative… almost regardless of the what's in the news.
His work shows that gold goes up when the bank's paying you nothing. That's where we are now… and that's what you need to know. John believes if the economy starts to recover before the election and inflation shows its head, the situation could get better from here for gold.
In short, gold looks good now, with low rates. And it could look better soon…
Invest accordingly,
Further Reading:
John's Top Ten list has averaged a 30% annual return for the 15 years he's been writing Gold Stock Analyst. So when John Doody talks about gold, we listen. Flip through the rest of our "rolodex" of experts here: Where We Get Our Ideas... and How We Follow 'em.
If you want to buy gold stocks, you can't miss Matt Badiali's recent report on a huge new gold resource just opening up to mining. Because of its remote location, minable deposits are selling for just $20 per ounce. As Matt explains, "Other investors are spending $150 an ounce to buy gold deposits that may never become mines and sit in far dicier political climates." Get the story here: Canada's Largest Untapped Gold Deposit Now Open to Investors. 
NEXT TOUR STOP: OUR NEW FAVORITE NICKNAME You can always depend on traders to come up with great nicknames. For our next stop on our "world currency tour," we present you with our vote for the world's best asset nickname. Our stop is Great Britain.
For years, the letters "GBP" have signified "Great British Pound" in the investment markets... just like "USD" signifies "U.S. dollar." But as Tom Dyson profiled weeks ago, Britain's government has gotten so deep in debt, and treated its currency so badly, traders are now using GBP to signify "Gordon Brown's peso"... a knock on the country's prime minister and his financial bungling (and a knock on Latin America's time-honored tradition of currency crises).
For a picture of this bungling, we'll look at the GBP since 2009. The sovereign debt problems of Greece, Spain, and Great Britain became big news late last year. Since then, Gordon Brown's peso has lost about 8% of its value.
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