Negative Real Interest Rates Continue To Drive The Gold Price

Precious metal analyst Ronald Stoeferle believes investors tend to focus on the daily "noise" and often forget the long term view. Stoeferle considers financial repression a critical aspect in today's economic environment, capital is channeled away from asset classes and flows into a more liberal environment.

November 18, 2012
Gold Silver Worlds

People tend to focus on the daily “noise” and often forget the long term view. The first point that Ronald Stoeferle made during our discussion, was that the major topics of his first report (from five years ago) are still relevant. In fact, he doesn’t see any fundamental change since then. The only change he noticed is that the figures became bigger, in the first place the debt levels and the amounts of the rescue packages.

The evil effect of financial repression

Ronald Stoeferle considers financial repression a critical aspect in today’s economic environment. Financial repression is a combination of incentives and restrictions for banks and insurance companies. Capital is channeled away from asset classes and flows into a more liberal environment.

In its essence, it’s a perfidious form of redistribution of wealth, taking it away from the saver. The beneficiary is obviously the debtor (think about the government in the first place). On a short term basis it helps to alleviate the huge debt mountain. Unfortunately, there is a significant long term effect that is not taken into account well enough. As the dependence on financial repression rises, so does the collateral damage that comes on the longer run. It will pave the way for an even bigger crisis in the future.

One of the most important pillars of financial repression is negative real interest rates. With the Fed’s announcement of QE3, negative rates are a sure thing till at least mid 2015. QE3 is the kind of rescue package that “nobody” would have believed to see several years ago, at least not in the current size. More importantly, it shows that the Fed is running out of ammunition. We see the same picture elsewhere in the world, like in Europe, Japan or the UK.

The marginal impact of every new measure is decreasing continuously. Ronald Stoeferle expects more measures and stimulus packages in the future. These types of actions sadly kick the can further down the road.

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