Lots of interesting stuff going on today. Our precious metals rallied and the open interest numbers continue to contract. However, the biggest story of the day flew under the radar.
You’ve probably heard it said that “gold performs best in an environment of negative real interest rates”. You’ve probably then asked yourself: “Self, what the heck does that mean?”. Well Turd The Answer Man is here to help.
Everyone knows what an interest rate is but what is a real interest rate? Simply put, it is your stated interest or coupon rate minus the rate of inflation. In a simple calculation, it looks like this:
5% (interest rate) – 3% (inflation rate) = 2% real interest rate
3% (interest rate) – 5% (inflation rate) = -2% real interest rate
The real rate should always be the investors primary focus. What good is a 10% bond if inflation is 20%? The only thing you’re guaranteeing yourself is a 10% annual loss of purchasing power. That dog won’t hunt.
Thanks to BrotherJohnF