Which Has Been Better since 1975, Gold or Savings at Bank?

With banks paying very little interest these days, investors have been seeking out ways to earn more than the paltry less than 1/2 percent that banks are paying on savings. The Federal Reserve has kept interest rates artificially low, hurting those seniors and other savers who don’t trust the stock or bond market with their nest egg. But some of these investors have put their money in the stock and bond market to try and earn a little more and so far, they haven’t been hurt by doing so.

Some investors have also chosen to invest in gold during the last few years and have seen their investment lose value. This article will assure those investors that despite any short term decline in the price of gold (and one could substitute silver for gold throughout this article), the precious metal is due for a bottoming and eventual rise to new highs.

The Fed’s hands are tied to low interest rates as long as the unemployment rate is above 6.5% as long as they feel like it (and as long as the market allows them to). The unemployment rate is at 6.7% presently so the Fed had to move the goal posts to accommodate their objectives as this rate moves below 6.5% in the near future (never mind that the U-6 rate which counts discouraged workers or forced to work part-time out of necessity is currently 12.7%).

The Fed Can Change Their Mind to Suit their Objectives of Economic Growth

The Fed has had a dual mandate for some time now, maximum employment and stable prices. With the government version of unemployment numbers falling, the Fed has had to change course from their original 6.5% target rate to ignoring the target all together.

With new Fed Chairman Janet Yellen taking over for Bernanke, the Fed policy is to  keep interest rates low even when economy recovers, that is as long as inflation stays at or below their 2% target.

The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

At present, the policy is to keep rates at 1% until the end of 2015, and then raise them to 2.25% by the end of 2016.  The U.S. CPI results from last month have inflation running presently at an increase of 1.5 percent for the last 12 months. What the Fed is saying is that no matter what the unemployment rate is and no matter what inflation does, they will keep rates artificially low until “they” see fit to adjust them. 

This policy is simply a recipe for disaster because the Fed has already proven they can’t see a bubble until after it pops. Greenspan didn’t see the housing bubble and acted too late in raising rates to cool off the housing market. Sir Alan didn’t see the bubble and neither even Fed Chairman Yellen had this to say about the Greenspan Fed caused crisis in April of 2009;

Fed monetary policy may also have contributed to the U.S. credit boom and the associated house price bubble by maintaining a highly accommodative stance from 2002 to 2004.

Yet Yellen can’t see what the current Fed policy, a repeat of the Alan Greenspan Fed policy, is doing to the markets!

To that end, she is just making stuff up as she goes along with policy now. But what if it doesn’t work out the way the Fed wants? What if deflation is too strong? The Fed will have no choice but to implement more QE. It’s as simple as that. It is a known fact to me that the Fed cannot allow interest rates to shoot up as higher interest rates would kill any economic recovery that might be occurring and cause major issues with the budget as the interest on the debt would become burdensome. This means your investments at the bank will still earn close to nothing. But one must make a decision on where to put their hard earned dollars. The choices are limited as the Fed’s policy has caused the appearance of bubbles in most all assets; stocks, bonds and real estate, although real estate is beginning to falter some already as more begin to miss mortgage payments.

This by no mean the bubbles are ready to pop in the stock market and bonds. I think bonds are still OK for the time being with current Fed policy and any future QE will be perceived as beneficial to the stock market. So lets take a look at where we are with gold, an asset beaten down of late, and get an idea of what lies ahead.

What’s Up With Gold?

The title of this article is “Which Has Been Better since 1975, Gold or Savings at Bank?” I think it is first important to understand a little bit about what the Fed is doing to get a better feel for the short and medium term pricing of gold which is why I explained my point of view above.

My last article We Are Not Off to the Races Yet With Gold  written March 12th called the top in gold almost perfectly. Gold hit a closing high of $1,385 two days after that article was written and has presently fallen $100 to where it sits now at $1,284.70. Silver was priced at $21.26 March 12th and presently is sitting at $19.41, a fall of 8.70%.

Short term we are due for a bounce in the metals, but I am still not convinced the selling is over and as I have been saying for some time, expect one more knock down to new lows. This isn’t what those invested in gold want to hear, but it is what I feel Market Makers will do to the metals. But this knock down, when it comes later this year, won’t be the end of the bull market as many on CNBC and elsewhere will be claiming. In fact, it will be the buying opportunity of a lifetime. Lets look at some data to make that case and ease the mind of those who own gold and garner some excitement about risk vs. reward for those who have not invested in gold. You wont see this type of analysis anywhere else.

I am presently waiting for data from the Treasury Department to fill in the blanks for the column in the table below representing the interest paid on the debt; years 1975 – 1987. But that is not as relevant for the points I am making in this article so I am presenting this chart without that data for now. I will incorporate the data into the chart when I receive it and erase this paragraph.

Which Has Been Better since 1975, Gold or Savings at Bank?

In finally answering this question, I was in a discussion with a financial advisor recently who made the comment that cash + interest has had a better return than gold over the long term. I wanted to look at the data myself to see whether or not he was correct. But in defining long term, one can’t really look at the years pre-1971 when the price of gold was fixed by the government and really shouldn’t look at years before 1975 because U.S. citizens weren’t allowed to even own more than $100 worth of gold. So any fair analysis of cash + interest vs. gold should begin in 1975.

If we can agree on this, which one should, then we get the following chart that compares year by year from 1975 to 2013 the interest paid on short term ordinary funds, defined by Measuring Worth as “The short-term interest rate for ordinary funds emanates from the normal course of business of financial institutions, for example, the ordinary lending of funds by commercial banks for a short time period” and the average price of gold for each of those years.

How Data Was Derived

Interest Rates

http://www.measuringworth.com/interestrates/

1975 Average price of gold and annual average gold prices

http://www.kitco.com/charts/historicalgold.html

National Debt

http://www.treasurydirect.gov/govt/reports/pd/mspd/mspd.htm

Interest Expense

https://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm

As you can see from the table above, a gold investment in 1975 became the clear winner over the long term versus a savings accounts in the year 2010. With the Fed keeping interest rates at or below 1% untill 2015, gold could technically fall to just over $1,000 an ounce and still be declared winner. But I included in this chart the elephant in the living room; the national debt and the interest paid on the debt each year. This is what Congress ignores while they budget even more debt for the next 10 years with a promise of balancing the budget after most have retired to cushy consulting jobs with their corporate friends 10 years from now. This is also what the financial media ignores. The Fed never talks about it. Only those who have calculators that can compute trillions talk about it. Most calculators can’t compute trillions.

Gold not only is priced well after this most recent fall, but it is poised to go much higher once the Market Makers are through with it. Gold at this time should be viewed as insurance more than a get rich quick asset to buy. We all know that once interest rates shoot higher, Congress and the Fed won’t be able to handle the interest payment along with all of the entitlement and other government programs they have approved, including the funding of the military industrial complex. Something will have to give and that something is inflation finally winning the battle versus deflation. When is the only question.

Unfortunately for now, deflation is what the Fed is fighting and even though gold has fallen in price to attractive levels, I think we still have to practice some patience before going all-in.

Deflationary Pressures

I have been writing about deflationary pressures since my book Buy Gold and Silver Safely was written in 2010. Richard Russell, who has been around the investment world for close to 5 decades now writing The Dow Theory Letters, had this to say yesterday about deflation propping up in Europe.

“There’s chatter about deflation in Europe. Already, Spain, Greece, Cyprus, Portugal, and Slovakia are deflating. But the two European stalwarts, Germany and France, have a slight bit of inflation. Draghi, head of the Euro central bank, swears he’ll do whatever it takes to avoid deflation.”

This is what I have been expecting. Draghi will do what the Fed here in the U.S. has been doing since the 2008 financial crisis; inflate. This will be perceived as dollar bullish which is also something that can hurt gold over the short term as the U.S. dollar hovers just above support where it has bounced from 6 times in the last 2 years.

Chart from Dow Theory Letters

I am still in the camp of a weaker Yen which we have been seeing, despite the recent trending, and a weaker Euro as they follow the Fed’s footsteps and I think we’ll see this occur more towards the last quarter of the year when current programs to help the European banks are rethought. It is truly a race to the bottom for many currencies and by default the world still views the dollar as the strongest of the bunch. Treasuries are further proof of how the world views the U.S financial strength, despite all of the issues that are hovering over us here.

That’s quite a track record of perception in the chart above that doesn’t disappear overnight. Perception is all that is keeping us from crashing here. While that is good for those who are invested in Treasuries, stocks and bonds, it won’t last. To them, I say enjoy it while you can. It’s been a good ride. At some point this Humpty Dumpty economy built on a sea of QE and artificially low interest rates from the Fed, will sink into what will more than likely be the depths of something worse than the 2008 crash as Fed Chairman Yellen wonders what she and all the king’s men did wrong.