Last Friday, gold experienced a “golden cross,” a technical indicator that occurs when an asset’s 50-day moving average crosses above its 200-day moving average. It’s the first such movement in nearly two years and is a sign that gold might have further to climb.
But there’s more exciting news involving gold. On the same day that New Jersey Governor Chris Christie endorsed Donald Trump for president, the precious metal received its own high-profile endorsement. In a note to investors, Deutsche Bank said it’s time to buy gold, writing: “Buying some gold as ‘insurance’ is warranted.” The bank also stated its opinion that gold “deserves to be trading at elevated levels versus many other assets.”
The metal is already up 15 percent so far in 2016, its best start to the year in decades. But it started 2015 strong too, if you remember, before prices began to collapse in February.
So what’s the difference between then and now?
Gold owes a lot of its success this year to negative real interest rates, something it didn’t have on its side in early 2015. As I’ve mentioned many times before, the metal has historically done well when real rates turned negative (because then you essentially end up paying the government to hold on to your money). To get the real rate, you subtract the consumer price index (CPI), or inflation, from the five-year Treasury yield. If it’s positive, investors will be more likely to put their money in Treasuries, and if it’s negative, they’ll seek out other stores of value—including gold.
In January 2015, the five-year Treasury yield averaged 1.37 percent, while inflation, less food and energy, posted a tepid 0.2 percent. This resulted in an overall real rate of 1.35 percent—a headwind for gold.
But here we are a year later, and real rates have gone subzero. With the five-year yield at 1.51 percent and inflation at a healthy 2.2 percent—its strongest reading since June 2012—real rates have dropped to negative 0.69 percent. This has helped make gold much more attractive to investors. For the month, as of February 24, the precious metal has risen nearly 10 percent.
There’s another way of looking at inflation, though—the ShadowStats Alternate Consumer Inflation index. For years, economist John Williams’ has reported actual, or “real,” economic data that often tell a very different story from the official government numbers.
Williams argues that at one time, the official CPI was useful in determining changes in consumer prices year-to-year. But government officials continued to tinker with their methodologies, in effect “moving the concept of the CPI away from being a measure of the cost of living needed to maintain a constant standard of living.”
Below you can see the actual inflation rate, according to ShadowStats, based on 1980 methodologies. Whereas the official CPI is 2.2 percent, “real” inflation is running closer to 9 percent, adding to gold’s allure.
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