The real real interest rate


What is the real real interest rate measured in? (If you didn't say "gold" then go directly to King World News. Do not pass go, do not collect $200. And for f#@%'s sake, stop reading Jon Nadler.)

Let's extend my previous analysis. First, if we wish to fit a parabolic curve of the form ab^(-t^2) + c to a series of descending price points (or ratios of prices, as I've been doing), the constant c is important, because a "singularity" only happens if c is negative (as we saw with 10-yr yields measured in ounces of silver).

That doesn't look to be the case with gold.

Yes, the $TNX/$GOLD ratio is also descending parabolically on the log chart. And, as usual, we can interpret the $TNX/$GOLD ratio as the amount of gold the US Government gives you every year for lending it $1000 for ten years. Throughout the 1990's, that amount stayed constant at 1/5 of an ounce (almost literally; see horizontal regression line in chart below). Nowadays, it's below 1/100 oz.


Note also in the graph above that, as with silver, I had only to shift the upper curve down and (slightly) to the left to get a nice parabolic channel. 


Because the equation of the above curve has a positive constant c added to it, it stabilizes at that value (asymptotically), never hitting zero. Meaning the maximum value of $TNX/$GOLD will stabilize at c = 0.0037. Theoretically, that means that the price of gold can keep falling towards zero, as long as yields fall even more. 

So, unlike the chart with silver, this one is telling us the "singularity" (interpretable as "hyperinflation") won't happen. Is there a key date we can extrapolate nonetheless? 

We could find the inflection point of the curve, which gives us the day the ratio starts falling at a slower rate than the previous day. That occurred in the spring of 2010. But the inflection point is not too interesting, because the rate of descent can slow down in relative terms while the ratio is still falling damn fast. 

What we're really interested in, then, is when the curve changes "qualitatively" on the log chart: i.e. the moment when the infinite journey to its asymptotic final value visually "begins". That can be calculated by finding where the third derivative (i.e. the "jerk") of the log of the curve equals zero. See the graph below to see what I'm talking about.


On that day (January 2015), if nominal yields are where they are now, at 1.60 (note that's 16.0 on $TNX), that would imply a minimum of $2,850 gold. If yield falls to 0.50, then gold's minimum price is at Nadler's price target of $877. 
If yield rises to its 10-yr average of ~3.5%, gold would be at a minimum of $6,150.

20 comments:

Bron Suchecki said...

"finding where the third derivative of the log of the curve equals zero"

You mean I should have bothered to remember derivatives from high school?

Another regression analysis to try: relationship between the number of hits a post gets and the frequency of the appearance of the words "log", "third derivative", "asymptotically", "database" etc :)

GM Jenkins said...

That would be an interesting exercise ... though ideally I'd need to adjust for 4-digit silver price forecasts :P

duggo said...

The above explanation is what makes people "believers" in the power of chart analysis. It has just the right balance of gobbledegook and mathematical terms to make Technical Analysis seem like a real science instead of a pseudoscience. The best you can say for Technical Analysis is that it's an art form. It the same sort of complexity that some astrologers bring to their calling. The final "give-away" is the prolific use of the word "if".
Still GM. Keep up the good work it's very entertaining.
Does it mean Gold is a sell?
oops! Sorry you don't give financial advice only technical analysis........ bingo!

Bron Suchecki said...

Posts score -1 for each appearance of "log", "third derivative", "asymptotically", "database" etc and +1 for each appearance of "to the moon", "$10,000 gold", "parabolic", "banksters" etc.

duggo said...

Dear GM
I trust you do not take too much offence at my sense of humour. I worshipped for many Moons at the altar of Technical Analysis. I'm afraid I lost my faith and went over to the Dark Side.
I really like Screwtapes. Keep going.

Warren James said...

@GM, nice work. You are In The Zone!!!

Gold at 19% p.a. increase (measured in dollars) would be at (back-of-the-envelope calculations) $2,394 /oz, so that is in the ballpark if the current trend keeps going .. and still allows for a slight fall in yield. What an interesting game.

I wonder if it represents a practical freegold date .... hmm. What I mean by that is that this would seem to represent the limit of which the US can keep fudging/bilking the system of real value through never ending monetary expansion.

@Bron, looks like you just handed me the most excellent post title .. "$10,0000 gold banksters to the parabolic moon". As an aside I find it interesting, btw, which of our posts appear to be being 'search engine optimized' externally (the tungsten gold and zero hedge articles).

GM Jenkins said...

Not at all, keep the criticism coming duggo - we at Screwtape Files University pride ourselves in allowing all opinions to be expressed, our acronym STFU notwithstanding.

GM Jenkins said...

this would seem to represent the limit of which the US can keep fudging/bilking the system of real value through never ending monetary expansion.

You're on to something here, for sure.

costata said...

GMJ,

Again, very interesting. One of the questions in my mind is: What is the definition of gold we should use?

These price extrapolations reference a unit price where paper gold and physical gold trade at par, say, X dollars Comex spot. So the prices that your projection gives may translate into a fraction of an ounce of physical gold in a physical only market with no paper leverage expanding the stock IF leverage has affected every number in your series.

Another problem that is on my mind is the currency unit of account. Keeping the gold price constant we could have gold at, say, "$2,394 /oz" as per Warren's comment but a new dollar at Y:1 exchange rate with an old dollar being used at $2,394 per ounce.

Perhaps your TA is more relevant to the timing rather than prices. As I said TA earlier isn't my forte so I'm merely thinking out loud here.

Cheers

duggo said...

Dear Screwtapes.
Can anyone enlighten me on the following recent quote from BrotherJohnF.
quote:-" Banks cannot buy Silver because it is too cheap".
This is almost like me saying "I've decided I am unable to buy food because it's too cheap so therefore I will starve to death".
Is it just me or do others find this complete nonsense.

It seems BrotherJohnf needs an explanation for himself as to why Central Banks do not hold or buy Silver. In his mind a rational explanation is because the price is too low.

I think I'm going nuts.

Warren James said...

@duggo - I think your judgement is true. What is cheaper? $1000 worth of silver or $1000 worth of gold?

I have a lot of very expensive silver for sale that these banks can buy - they can buy it from me for $2,000/oz. There, problem solved.

What is the context and link for his quote? (I can't find it on a cursory check).

duggo said...

Hi Warren
If I remember correctly it's at the beginning of his latest video "Fiscal Cliff" in the questions section.

http://www.youtube.com/watch?v=GitCvGFXi2M

He seems to think that Banks have too much money to enter the Silver market.

It's like me having to much money to enter the Ford market because I have Ferrari money.


anon said...

Who cares about G & S when you can buy a $1Trillion platinum coin?

http://www.washingtonpost.com/blogs/wonkblog/wp/2012/12/07/could-two-platinum-coins-solve-the-debt-ceiling-crisis/?wpisrc=nl_cuzheads

jojo said...

BrotherJohnF??

/SleepingVillage/ said...

C'mon, guys. Central bankers have lots of silver. It's just that it's shaped like spoons and forks and shit:) Maybe the odd tea pot or two!

Louis Cypher said...

@Duggo,
I haven't read BJ's blog but I'll assume what he means by too cheap is that it's too cheap per oz. or too bulky.

duggo said...

@Louis Cypher
BrotherJohn's reasoning is that because banks have too much money they could buy the total Silver market. They are the proverbial elephant trying to squeeze into the broom cupboard.
It's all total nonsense as far as I'm concerned but it is a reasonable argument if your whole raison d'etre is based on Silver being a manipulated. It's as though BrotherJohn is laughing up his sleeve because he knows that the banks know that this is their Achilles heel. He has to believe in this wrong headed scenario otherwise his whole argument about Silver being criminally undervalued and unbelievably scarce flies out of the window.

mr pinnion said...

Yep, it s not silver thats too cheap. It s the bloody big bank vaults you have to build to keep it in thats too expensive.
Ever wondered why central banks dont hoard bog roll? Too bulky , just like silver.
Time to start stacking bog roll me thinks.
Regards
Ozzy

Warren James said...

@duggo, thanks - I finally found the quote @18:10 - 20:50. Without a hint of irony, he (unwittingly) puts forward an argument supporting FOFOA's observations - that silver makes an incredibly poor reserve asset ... silver is too small a market to absorb buying from central banks - it would explode the market and leave no metal for industry. Anyone continuing that thought experiment might assume that a lightning quick raise in the silver price (from Central bank pressure) might be a welcome effect for their balance sheet, but from there the volatility of the asset (due to mining supply and influx from above ground stocks) becomes a big issue for stability.

Pity, since I had another offer for the central banks which gets around the bulky storage issue. Unfortunately my selling price for silver has gone up to $4,000/ounce - but this should be beneficial since that is twice as good density value as gold! The good news however, is that I can supply almost unlimited amounts at this price. I also have platinum for sale, and I may be able to match the $1 Trillion asking price! ;p Warren

Warren James said...

(Sorry, not twice the density value since gold is heavier than silver, but apart from the silliness of my offer to supply 'non-cheap' silver, it's easy to see that central bank asset allocation is basically just a game - what matters is the productivity of human society and the flow of value. Cheers all.)