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We at The Global Speculator like to study historical interest rates in an attempt to gauge where we are placed in the economic cycle and where we are potentially heading. The above chart gives an overview of Inflation (Core CPI), Interest Rates (10 Year Bond Yields), The Actual Australian Gold price, The Theoretical price of Gold in Australian Dollars (See the explanation for the individual chart), the All Ordinaries Index (The Australian Stock markets major index) and the Money Supply measured by M3 (Bottom section) over the last 47 years. Studying the relationship between all these attributes helps to put things in perspective.
From this chart we can determine that inflation and interest rates are presently close to historical lows. Another important observation is that the money supply has expanded rapidly over the past 36 years or so since the Gold Standard was abolished in 1971. With interest rates trending lower over the past 25 years, it should come as no surprise that debt has been the major driving force of this increase. Looking at the All Ordinaries index, we can see that the stock market has been a major beneficiary of this advance in money supply. With an expanding monetary supply comes inflationary pressure. This inflation initially finds its way into asset bubbles via increased investment (Property and Shares etc). It then inevitably emerges as Core Inflation, spilling over into the everyday goods and services that we consume, directly diminishing the purchasing power of our disposable incomes.
It is at this stage that Gold becomes an attractive investment alternative as people start to search for inflation protection strategies. Interest rates invariably increase during these cycles as Central Banks tighten monetary policy to combat inflation. This then exerts pressure on the asset classes that have been the major beneficiaries of the preceding credit orgy (namely the stock and property markets). It is over this period that Gold starts to outperform these other asset classes as in the 1970’s and early 80’s (Refer to the top section of the chart which is Gold’s performance against the All Ordinaries index).
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