Which Has Done Better Since 1975, Gold Or Bank Savings?

 | Apr 23, 2014 06:20AM ET

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 eggs. 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 PM 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% ).

h3 The Fed Can Change Their Mind to Suit their Objectives of Economic Growth/h3

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, then raise them to 2.25% by the end of 2016.  The U.S. CPI results from last month have inflation running presently 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 even Fed Chairman Yellen had this to say about the Greenspan Fed caused crisis in April of 2009:

Get The News You Want
Read market moving news with a personalized feed of stocks you care about.
Get The App

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.

h3 What’s Up With Gold?/h3

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%.