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Most people that have been doing this for awhile know there are relationships between gold, silver, the 10 year, and the USD. Here, I’d like to show you some examples of these relationships and walk those a little newer through the nuances, and what conclusions the metals guys draw from these relationships. Interestingly enough – some of these are correlated, until they are not. Some of these are negatively correlated, until they are not. Let’s take a look at some examples of relationships and discuss.

The big one – REAL rates and gold. This is the grand daddy of all of the relationships you must understand. How this is supposed to work is that gold yields zero percent interest. If your 10 year rates are 3% and your inflation is 2%, this gives you (3-2) a REAL yield of 1%. If this is GREATER than 0, people will put their money into the 10 year. If your 10 year is 1.7%, like now, and inflation is 4.7%, that would give you a -3% REAL yield, and people would put their money into gold.

If you look at the REAL rates, in this chart, you see valleys that are a few months past gold’s peaks.

You see peaks in this in 2008, 2011, mid 2016, and 2020.

So one could make the argument that as real rates are declining, gold rises in anticipation of a valley. However, when trying to find good inflation data, or any charts that track REAL rates against gold – simple people like myself don’t have this tool.

What many do is sort of track the 10 year as a proxy for this whole thing. If you overlay the 10yr with gold, you can see an inverse relationship – MOST of the time, with the exception of the periods in blue below.

Making a QUICK decision, just seeing the 10yr move can make the paper pushers come in and out of gold. The big assumption here though is that inflation is a stagnant and permanent 2% or the like. Meaning, the ONLY variable moving in the REAL yield is the 10yr. The main problem with this is that there are two prices then – the paper price on the COMEX and then the REAL physical price of bullion people take possession of.

This then gets a little more screwy. Within the REAL physical price, I would thus contend there exists two more prices. The dealer prices and the consumer prices. That is, the price at which a dealer sells is different than a price at which a consumer sells. Why?

If you are a COMMODITY like silver, and you are being paid the price of your commodity, you make millions of ounces and sell it at the price the banks tell you. They finance you, to an extent, so if you rock the apple cart, they can make life very unpleasant for you. So you sell your product at the price they hold you hostage at, and this goes to refiners, who then have it go to the bullion banks and mints in large bars, or dealers in smaller bars, coins, rounds, etc. The DEALER price, in times of high demand – can go up with a higher premium. This separates it from the paper price. But we have one layer further, which is perhaps the fear element. This is the consumer price which is now far higher than the dealer price. As long as dealers are able to get supply from mines at “spot”, this system of three prices will work – for now.

• Spot price – derived from paper products and may trade rapidly with high frequency trading. Physical possession of metals within this exchange is very limited – and of which perhaps less than 1% of all silver “sold” actually changes possession. This is a “derivative” price. I’d also contend this is where the “commodity” price of silver is.
• Dealer price – based off of spot price, plus dealer premiums. A mine gets its price, the refiner gets its cut, and with various mark ups and profits, dealers then have premiums passed on to the customer. In times of tight supply, this drives premium prices up, not necessarily spot price.
• Consumer price – this is the price the consumer would let the silver go at. What Miles Franklin and many other dealers are reporting are that sales are great, but their inventories are not coming from consumers selling back. This price, I’d contend, is where the free discovery of the “monetary value” of silver is. Maybe a person buys silver at $32 per ounce with the dealer premium, but they aren’t willing to sell until $40. I’d say the greater the fear of what the next year may hold, the greater that dollar amount is to the holder. If they fear currency collapse inside of 3 months, that price of silver, for them, might be $300 per ounce. They could take that fiat and pay off their house and have no debt. If you cannot pay that ransom, they aren’t selling. This price is variable, and the more fear, the higher this price is – meaning dealers will not get inventory back from consumers in a high fear situation.

So if we know gold and the 10yr can be negatively correlated, a lot – and gold perhaps leads the negative REAL rates, how does silver play into this? If you simply add silver to the chart, take a look at the close correlation to gold. You can thus also see silver moves mostly inverse to the 10yr.

So does this mean if interest rates go up, that gold and silver will go down?

No.

Take a look at the interest rates from 1971 to 1983.

So if we have gold in that same time period, AND if it was inverse, we’d expect it to decline with a sharp valley at the end?

If you can see – gold went up WITH the 10yr for a decade, until such a point that the 10yr was raised up enough to overtake inflation. At which time, perhaps the 10yr was 15% and the rate of inflation was 10%. This meant that a real yield of 5% was better than gold at 0%. When the 10yr finally gets to a point, gold then collapses.

Edit – thanks to a commenter to point me at QUANDL for tradingview charts. Take a look at the 10 year and gold going back 13 years. If there ever was a doubt of the drive of gold, please…take a look at this. This is about as inverse as you get.

By extension, if you think gold and silver are then correlated, then silver and the real yield must be correlated. Add silver to this…

Now, let’s take a look at inflation rates in the 1970s.

So – everyone right now saying the 10yr is going up, is not good for gold and silver is missing one giant piece of the puzzle. The other part of the REAL RATE which is inflation.

Currently, the government would love to tell you inflation is at 1.7%. This is called the CPI rate, and this has been messed with so many times over the years. We are now told the government is “looking” for inflation, and trying to make up for “inflation deficits”.

The problem with that is many estimate inflation is actually much higher. The 10yr is going up because….people know this and are seeing inflation. They realize that if inflation is 2.5% and the 10yr is 1%, it’s stupid to lose 1.5% of your money every year. They sell and put into gold, so to speak. As this 10yr rate increases, it is potentially showing LESS negative yield, at which the paper hands get out of gold and go back to the 10yr. I believe the Fed is calling this “transitory” due to their belief that this is all temporary supply chain issues due to COVID and prices will recede and normalize. They could be right.

BUT…remember, if inflation is continuing to rise, the 10yr is a trailing indicator. If there was no inflation, why would they need to continuously buy bonds, which depress the 10yr rate?

The CPI you see is a 12 month trailing indicator, and based off of measurements many don’t agree with. In the Fed’s defense, they want to show lower inflation. IF they can demonstrate lower inflation, and convince you of that magic trick, then rates don’t have to go up.

Day by day, less are getting fooled.

At shadowstats.com, they show a different picture of what inflation is.

If using the 1990 measurements, you are looking at perhaps 5% inflation today. If the 10yr is at 1.6, that’s a -3.4% real rate.

But what if the dollar goes way up or way down? It depends….sometimes there’s a correlation, sometimes not. I think when gold and silver are jewelry and industrial components, they can run in the same direction. However, when they are looked at as money, this is when you can have the divergence.

If you look at the massive performance of gold versus the dollar over the last 12 years, you don’t see a lot of correlation.

Look at the massive rise up in gold from 2009 to 2011, with the dollar going sideways.

On a short scale of the last year, let’s look over the last 2 years:

You see the dollar going sideways, and gold rising. Gold then did have a shift up when the DXY dropped in July 2020. But…you can see the dollar slid since then, and has slightly recovered – but you see gold on an 8 month slide, many times moving WITH the USD.

Conclusions of these relationships

• Gold and silver are highly correlated. They are money, and have been money for 5,000 years. The COMEX created in 1974 has suppressed these prices for many years as a commodity. Occasionally, their identity as money is revealed, and this price then is re-discovered.
• I don’t put a ton of stock in the relationship between the DXY and gold/silver. At times it is there, at times it is not. It is more important to look at REAL RATES. That being said, gold is the anti-currency I’ve heard. I wish I could give credit, maybe David Morgan? If you are having less faith in the dollar, you may move to gold. Or, perhaps a portion of your cash to hedge against the worst. If the value of your cash goes down, the value of your gold in USD goes up. If the value of your gold goes down, the value of your USD goes up. Maybe. Depends how the correlation looks, that day.
• The 10yr can be a short term proxy to ballpark if gold or silver should be going up or down in times of stagnant inflation – that is, inflation moving sideways. The only item that moves is the 10 year. Problem is, no one is trusting this is stagnant inflation.
• The 1970s showed that during times of extreme inflation, the 10yr moved WITH gold and silver. This is because the rates of inflation were higher than the 10yr.
• Real yields are the ULTIMATE indicator of gold and silver prices. When this price is not congruent with actual real rates, a price explosion is imminent as paper prices take months or years to catch up to the divergence.
• Consumers appear to be performing price discovery on “monetary” metals by FEELING inflation
• Consumer demand for silver has overtaken industrial demand in 2020 and looks to be much higher in 2021
• Paper price divergence from dealer price, which is diverging from consumer price. This three tier price system is about to break up, and hard. This will cause backwardation of epic proportions and create massive opportunities for arbitrage if paper price does not naturally correct, and soon
• Bond yields are being capped by the fed by buying $180b in bonds monthly. This is unofficial yield curve control, as the 10yr is not being allowed to catch up to inflation. This has created NEGATIVE REAL RATES that the fed is trying to obscure.
• Metals will continue to be transferred at discount rates until production of industry is disrupted or paper price makes significant gains. Obscure stockpiles all over the world have been drawn from (unallocated??), and it appears that reduction in derivatives such as unallocated going to cash may create another massive way of either physical buying or PSLV investment.
• Gold and silver prices most definitely can rise with rising 10yr rates. However, it appears at some point the 10yr rates may be capped while inflation runs relatively unchecked.
• $3T infrastructure package in play as well as more stimulus packages, perhaps “monthly”. This is not the sign of a healthy economy and this is becoming clear and apparent to even 5 year olds. DXY could go down with this, and this could then have gold go up.
• It appears that interest rates will never be allowed to rise, again, until a reset of debt occurs.
• The tools that stopped inflation in the 1980s can no longer be used, today, without default on debt. Potentially, this means inflation can be an escalating situation, and cannot be stopped. This is how a hyper-inflation mechanism is formed. Creating more debt to address debt.
• It is not a matter of if, but when metals start to melt up. I feel both gold and silver have had nice handles form and launch into orbit could be any hour of any day now.
• Metals will take the front page of every newspaper in the world. Panic buying not that long after. This is where an “elevated” inflation takes place, as people draw money from savings and out from under the bed to convert to real and tangible goods. Escalated amounts of dollars competing for limited supplies creates massive mark ups of goods.
• Currency collapse is not far after this. It is possible we can circle the drain for another 4 months or 10 years, it depends how insane this gets with money printing and at what point public perception changes.

Conclusions for MY investment thesis – not investment advice for you, by the way!

• The 10yr/inflation equation drives gold, which, in turn, heavily correlates with silver. The DXY sometimes moves with gold and silver, and sometimes doesn’t. Keep an eye on the 10yr, but keep it in context with the rates of inflation, don’t just treat it standalone. The importance of the 10yr moving up is:
  • Signs of a raging economy on fire OR
  • Signs of massive inflation where rate increases can slow the economy
• Big picture to keep in mind is that the only relationship with the DXY and gold that matters, to ME, is an indication of a failing currency will have citizens running to gold, silver, real estate, and any other hard assets. There may be times when this goes up and down – but this is a paper price relationship I’m observing. Meaning, the DXY can go from 92 to 95 in a day, and anyone who bought gold at home is not running to their coin shop to cash it in.
• There may be a time in the distant future where gold and silver are highly overvalued relative to other things. That day is most certainly not today, nor probably in the next few years.

One would then have to use critical thinking. If the economy was on fire and all was well, why would the fed then do QE and buy bonds? This is to create “full” employment as part of their mandate, so they say. They cannot seem to find inflation, yet the 10yr wants to continue higher. Commodities prices are surging, up 20-60% in a year. You can then observe more bonds being bought by the fed and rates going down.

This is telling me that inflation is most definitely higher than the 1.7% reported, and since artificial manipulation of the rates is at play, it’s telling me there is a significant negative rate already there.

With this, investors are continuing to pile into the physical bullion while the paper price has diverged from the “consumer” price. As this gap widens, either the paper price has to catch up or else massive backwardation happens and continuous opportunities for arbitrage exist.

All of this leads to me to believe we are looking at a decade like the 1970s where inflation is highly expected. We cannot stop inflation with rate increases, this time, however. In the 1970s, gold increased 24x and silver increased 29x. While most people aren’t very patient in waiting for things to develop, my investment thesis is to have my pieces set up on the board and let it develop. There are some opportunities here and there to try and time things with options, but overall, metals for me is the place to be in a high inflation environment.