An Era of Low Time Preference

Last week the price of gold moved up another $16, and the price of silver was up $0.14.

 

10-year treasury note yield since 1999 – it is almost back at the multi-decade low of 2016. The only other time in history when US treasury yields were this low was in 1944-1945, when the Fed was actively suppressing yields in order to provide cheap financing for the war effort. One year later (from mid 1946 to mid 1947) the CPI jumped to more than 17% per year. By 1951 it had reached 21%. At that point the Fed and the US Treasury finally agreed that the Fed should stop pegging long term treasury yields – which promptly proceeded to rise relentlessly for the next three decades. [PT]

 

We just want to offer three thoughts about the markets this week. One is: “wow!” Look at the interest rate in the US drop. Remember when the ten-year Treasury was “breaking out” over 3%? Now, look at it. 1.5%. It’s nearly back to its all-time low set a few years ago. It will fall farther than that, ere the end.

Next, a common meme we are seeing in the gold community is that people are losing confidence in central banks and their toilet-paper currencies. Not yet, they aren’t (notwithstanding Argentina and its ilk). When it happens — it will, but today is not that day, as our old friend Aragorn would say — you will observe permanent gold backwardation.

 

Argentina: the peso from 2005 to 2019 and the Merval Index over the past year… here is a chart showing the crash in Argentina’s 100-year bond. [PT]

 

That is, the co-basis on every futures contract from near to the farthest reaches of the board, will be well above zero. And rising. And the price of gold will be rising, probably exponentially. With each uptick in price, the co-basis will climb higher. We will be not only chronicling that, when it happens, we will be bellowing it from the rooftops!

Three, much is being said that lower interest rates are a driver for higher gold prices. We have documented in the past that there is not a simple correlation between interest (either short-term, or the yield on the long bond) and the price of gold. It’s something else.

Like with most other macroeconomic variables, one cannot simply ask “where is the threshold?” It does not work that way. There is no magic debt-to-GDP number that guarantees collapse, much to the embarrassment of those who used to promote this hypothesis.

There is no magic quantity of dollars that causes skyrocketing prices. And no magic interest rate, that drives up the gold price. What we need is a spread, or a ratio.

We should compare the market interest rate to marginal time preference. Time preference today is much lower than it was in the 1970’s. In the 1970’s, people wanted real goods even to the point of filling their pantries full of canned food they wouldn’t eat for years, so desperate were they for real goods.

10% (or more) in the bank was no temptation for them to park their dollars. So we say time preference was very high indeed. Today, it’s the opposite. Even for zero interest earned in a bank account, people prefer that to a discounted pair of shoes they are certain to use in a few months. So we say time preference is low.

That’s why the low rate of interest is not driving the price of gold to the moon. Of course, not everyone has the same preferences. Some have a higher time preference. That’s why the price of gold is $1,500 for the first time in years.

 

Fundamental Developments

Now let’s look at the only true picture of supply and demand for gold and silver. But, first, here is the chart of the prices of gold and silver.

 

Gold and silver priced in USD

 

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio (see here for an explanation of bid and offer prices for the ratio). The ratio inched up this week.

 

Gold-silver ratio, bid and offer

 

Here is the gold graph showing gold basis, co-basis and the price of the dollar in terms of gold price.

 

Gold basis, co-basis and the USD priced in milligrams of gold

 

We see a small rise in scarcity (i.e., the co-basis), along with a small rise in price. The move continues to be driven by buying of physical metal.

This week, the Monetary Metals Gold Fundamental Price went up further, to $1,516.

Now let’s look at silver.

 

Silver basis, co-basis and the USD priced in grams of silver

 

The scarcity of silver appears to be up. But keep in mind that the September silver contract is nearing expiry. And it is subject to temporary backwardation, due to selling pressure from all the naked longs who must roll their positions.

There is a (smaller) rise in the silver basis continuous too. The fundamental price moved up again, to $16.93.

 

© 2019 Monetary Metals

 

Charts by stockcharts, investing.com, Monetary Metals

 

Chart captions by PT

 

Dr. Keith Weiner is the president of the Gold Standard Institute USA, and CEO of Monetary Metals. Keith is a leading authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads. Keith is a sought after speaker and regularly writes on economics. He is an Objectivist, and has his PhD from the New Austrian School of Economics. He lives with his wife near Phoenix, Arizona.

 

 

 

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