Silver & Gold Don't Lie

Key Concepts:

• Real Interest Rates: The nominal interest rate (e.g., Fed funds rate) minus the rate of inflation.
• Negative Real Interest Rates: Occur when the inflation rate is higher than the nominal interest rate, meaning the purchasing power of money decreases over time even with interest earned.
• Gold Bull Markets: Periods of sustained price increases for gold.
• Fed Funds Rate: The target interest rate set by the U.S. Federal Reserve.
• Consumer Price Index (CPI): A measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
• Shadow Stats CPI: An alternative measure of inflation that attempts to calculate CPI using the methodologies employed by the U.S. government prior to changes made in the early 1980s and 1990s, often resulting in higher inflation figures than the official CPI.
• Inflationary Pressures: The economic forces that cause prices to rise.

Recap: Real Interest Rates and Gold Bull Markets

The discussion begins by referencing a previous video's speculation that the bull market would continue, primarily driven by negative real interest rates. A chart was presented, illustrating a strong correlation between two distinct gold bull markets (highlighted in red boxes) and periods of negative real interest rates (represented by "stalactites" on the chart). The standard calculation for real interest rates was defined as the Fed funds rate minus the official CPI.

Methodology for Calculating Real Interest Rates

The core methodology involves subtracting an inflation measure from the nominal Fed funds rate. The initial approach used the official CPI. However, a specific request was made to refine this calculation by substituting the official CPI with the Shadow Stats CPI.

Introducing Shadow Stats CPI for Enhanced Accuracy

The speaker was asked to adjust the real interest rate calculation using the Shadow Stats CPI, which is considered "probably more accurate" as it reflects "the government's old numbers" for inflation calculation. This alternative metric aims to provide a more consistent historical view of inflation, often showing higher rates than the current official CPI.

Analysis of Adjusted Real Interest Rates

Upon implementing the Shadow Stats CPI adjustment, a new data series was generated, represented by the black line on the chart. This adjusted line revealed that real interest rates have been "really, really deeply negative" for "decades." This finding suggests that the extent of negative real interest rates might be significantly underestimated by using only the official CPI.

Real-World Inflation Experience and the Midpoint Metric

To provide a balanced perspective, a gray line was introduced on the chart, representing the midpoint between the official CPI and the Shadow Stats CPI. The speaker expressed a personal belief in the gray line's ability to reflect the "real experience" of inflation, particularly in the context of recent economic events. This includes the inflation observed after COVID-19 restrictions lifted and the influx of currency from stimulus checks entered circulation. Examples of this real-world experience include the increased cost of dining out and supermarket shopping. The speaker stated, "I sort of believe that gray line in the [context of real-world experience]."

Conclusion and Main Takeaways

The analysis reinforces the argument that deeply negative real interest rates are a significant driver for bull markets, particularly in assets like gold. By incorporating the Shadow Stats CPI and considering a midpoint between official and alternative inflation measures, the video highlights that real interest rates have been profoundly negative for extended periods, potentially more so than commonly perceived. The speaker's preference for the gray line (midpoint) suggests that a blended approach to inflation measurement might best capture the actual economic reality and consumer experience, further supporting the underlying conditions for continued market strength.