Last week, we did a piece on Gold lease rates after their huge spike on Friday, October 11. This week, as Gold fell further, but not as far as it did last week, Gold lease rates gave back some of the rises of October 11, but by the end of the week, the longer-term rates were once again heading upwards.
Privaateer and GTW (Gold This Week) subscribers can take a look at the raw data on Gold lease rates and at the charts on our regular daily update of lease rates here.
We also asked the question: The Start Of Another Lease Rate Spike? The jury is still out on that one. Lease rates have stabilised at varying levels above where they were on October 10, but even the longest-term (1 year) rate is still below 1.0%.
Looking at Gold lease rates, most Gold analysts would say that higher rates are "good" for Gold. And of course, if you look at the history of Gold prices in the wake of the two big lease rate spikes of late 1999 and early 2000, Gold did indeed go higher when the lease rates blew out. But ask the "average" analyst (Gold or otherwise) whether higher interest rates "per se" (bond yields, Central Bank controlled rates, Prime rates etc) are "good" for Gold and most will say no.
Their reasoning goes like this. Gold is a non income producing asset so it is hampered in comparison to assets which pay a rate of return - interest rate. It therefore follows that the higher the rate of return being paid by assets which sport an interest rate, the more attractive they are vis a vis Gold, which is entirely dependent on "capital gains" to pay a return.
Therefore, lower interest rates are good for Gold because the lower the rate, the smaller the differential between an income-producing debt asset and Gold.
Now in reality, unless an "interest rate" is totally isolated from economic input because it is set at whim by a government controlled Central Bank (the Fed Funds rate comes to mind), there are three components which, combined, make up what the Austrian Economists call the "gross rate of interest". These three components are:
It is true that governments and their Central Banks can distort the actual level of interest rates being offered on the market, but they cannot "repeal" any of these components of interest rates. Should they try to distort rates, then at some point, the resulting distortion of the economy will overwhelm them and these three components of MARKET interest rates will re-emerge with a vengeance. That will result in MUCH higher interest rates, higher than they would have been if the government had not distorted the economy, or had distorted it to a lesser degree and ceased their distortions earlier.
In fact, and in economic history, higher interest rates, especially higher interest rates on government debt paper, go hand in hand with higher Gold prices. An examination of the Gold bull markets of 1973-74, 1978-80, and 1986-87, show this process in action.
As you know, for many years now, economic and financial distortions have been endemic worldwide and steadily worsening worldwide. The acme of these distortions are in the US, not so much because they are worse, but because their effects have so far not been allowed to come into play. While US stock markets, despite their present rally, have lost a lot of ground, the US currency has only just begun to register the distortions (and it has been rising since July) and US interest rates, especially government interest rates, have not reflected them at all.
As recently as October 9, not much over a week ago, the yield on three-month, two-year, five-year and ten-year Treasury paper hit 2002 lows - lows not seen since the mid 1950s. October 9 also just happened to be the day when the Dow hit its 2002 low close of 7286. Six-paper closed within one basis point of its 2002 low on October 9 and Treasury bonds (30-year paper) closed within two basis points of its low for the year.
Since then, Treasury yields, right across the curve, have ballooned upwards. This has not yet had any effect on either US stock markets or on the US Dollar, but it will. It has not yet had any effect on Gold either. The continuing rally on US stock markets (which are in part a function of capital being switched from bonds to stocks) have kept Gold prices falling.
T-Bonds, which have been rallying since US stock markets topped out in early 2000 and especially since late March this year (when the Dow hit its 2002 highs) had their biggest weekly fall of the year this week. Just as Gold lease rates spiked higher last week, US interest rates have spiked higher this week.
At this point, US market signals are distorted as seldom before. Stock markets are rallying on nothing more than the pious hope of "better earnings". At the same time, the yield on senior corporate debt paper is skyrocketing - Ford's paper hit 10% on October 18. The Dollar is rising again, mostly against the Yen but also to some extent against the Euro, while the US records its biggest trade deficit ever and government spending explodes higher by the day. On top of it all, US money supply numbers are once again accelerating. Why? There is no rational reason, but there is a political reason, the US mid-term elections are less than three weeks away.
Gold is in the doldrums, but the signals of impending economic implosion are proliferating. The most ominous one yet is the blowout on Treasury yields since October 9. Remember, all BIG and sustained Gold bull markets come in train with HIGHER interest rates, ESPECIALLY higher rates on government-issued debt paper.