Quantum Change In Gold Demand Continues

Short-term interest rates have been relentlessly rising since the second half of 2015. For example, 3-month LIBOR was 0.28% in July of that year. It is now 1.7%. This is just a result of the Fed centrally planning our economy, managing our interest rate for us.

Long-term rates have not moved. The 10-year Treasury yield in July 2015 was 2.5%. It is now … 2.5%.

The direct result of this is to compress the profit margins of banks. Banks borrow short to lend long—they may borrow at LIBOR to buy 10-year Treasurys. What had been a nice trade grossing 2.5 – 0.28 = 2.2% has been deflated to 2.5 – 1.7 = 0.8%. That’s the gross profit, but the net is less than that due management and other costs.

At the same time, the euro has gone from $1.11 to $1.20, the pound has gone from $1.56 to $1.36, and the Chinese yuan has gone from $0.16 to $0.15.

Copper has risen from $2.63 to $3.24, oil has incremented from $58.98 to $61.63, and wheat has dropped from $5.80 to $4.30.

To Wall Street, these data (and others I did not cite) signal good times because the economy is robust to Fed normalization (whatever that means), risk-on assets are rising, and inflation is tame with food going down, oil stable, and copper going up to prove that the economy is healthy. Oh and now we have a Republican president, so that confirms it.

However, not everyone agrees. To many in the gold community, we are overdue for inflation with a vengeance because the money supply grew so rapidly after the crisis of 2008, because Uncle Sam is abusing his credit (no comment on what other governments are doing), and look at copper. And oil. And the world is going to dump the dollar.

It should come as no surprise that we disagree with the Wall Street party line. Wall Street is talking their book, not to mention overjoyed that they can continue to borrow to own assets that only go up. The Dow Jones Industrial Average recently topped 25,000. If assets go up, but consumer prices do not, then the purchasing power of your wealth is rising. Upon liquidation, you could buy more groceries (and BMW’s) than ever.