Most people whether academics or laymen believe that higher interest rates are bad and lower interest rates are good. This is particularly true when it comes to the gold market. But if that's true why did gold fall from $800 dollars an ounce to $250 dollars an ounce as interest rates fell from 21% to 4% in the 80's and 90's? And why did gold rise from $35 dollars an ounce to $800 dollars an ounce when interest rates rose from 4% to 21% in the 60's and 70's?

Higher or lower interest rates are not a sufficient fundamental reason to move gold in an inverse direction -- yet they do today, at least in the short term. The overwhelming perception today, is that higher interest rates are bad for gold and lower interest rates are good. When the recent lower employment figures hit the wires the assumption was immediately that the Fed would be on hold longer than anticipated. Stocks fell, interest rates fell, and the dollar fell, all due to a perceived weaker US economy. This benefited gold. But this is short  term and I must say, shallow thinking. 

Steve Liesman said something on CNBC  that I've not heard before voiced on financial channels or in the  financial press, or most anywhere else for that matter. He was talking about  what Ben Bernanke thought about low interest rates. He said that Bernanke said  the Fed doesn't control interest rates; they influence them, and mostly follow  them. That's a profound statement. Then Liesman talking for himself said, "If the Fed didn't intervene  at all, interest rates may not be much different than they are now". That's the first time I've heard that idea expressed anywhere in the mainstream press. Of course you've heard me banging the table on just that point for years, in my book and in the commentaries on this site. It is absolutely correct, what both Liesman and Bernanke said. But why did it take so long? It is a radical departure from the obsessing of the economic community, investment community, and the financial press over when the Fed will move interest rates.

Interest rates around the world are historically low not because of QE, or central bank policy. They are low because of historically prolonged economic stagnation and recessions, and prolonged  disinflation and deflation. If interest rates fall to zero it is because deflation and recession is accelerating. And if interest rates go back to  3-5% it will be because inflation and growth are accelerating.

It must be said: central banks, politicians, and governments throughout the world have little control over economic growth, employment, inflation, or interest rates. It's all a delusion. Central banks  react to these factors -- they do not create them. (The exception is the wilful or totally ignorant act of inflating or deflating the money supply.)

Take, for example, the mystery of the lack of wage growth. Most economist and all politicians can't figure out why  there's no wage growth even though growth has increased and unemployment has decreased. The explanation is in looking at wages in real terms. If  prices are falling by 2% a year, for example, and wages remain the same, wages  are increasing by 2% -- not in nominal terms, but in purchasing power. In a world of deflationary pressures, wages are doing well staying the same. During the Great Depression they fell like a rock. It is looking at interest rates in real terms that tell you whether the Fed is running a loose or tight monetary policy.

The reason inflation was not only tolerated but fostered during the 60's and 70's in this country, was to con the unions who  were demanding higher wages. The government created inflation to placate their most powerful constituents and everyone made more money. But they really didn't. They made more dollars, but their dollars bought less and less in real terms. Standards of living fell for 20 years.

So to understand what is happening in the real  world, you must think in terms of real money, real value, and real solutions.  Otherwise you'll end up looking at smoke and mirrors and truly believing that  you're looking at reality. Unfortunately, our intellectual elites that are running the show do not know the difference. If you don't understand the problem, you can't devise a solution. That's why we are puttering along a 2% growth rate as debt increases far and above what can be paid off.

So where are we today? The world in general is  and has been stagnant and debt ridden for about 8 years. It is the worse  economy since the Great Depression.

Eurozone deflation recovered from minus .3% to minus .1% and unemployment fell to a 3 year low, to the 11% area! Is it any wonder  that interest rates went negative in some parts of the Eurozone? Consumer confidence rose here in the US. The Chicago PMI rose. Home prices rose. But we are now officially in an earning recession as we have seen company profits fall for two consecutive quarters. That's why we just completed the first negative quarter for the Dow in two years. The stock market is presently negative for the year.

And what does gold and silver "think" about all this? Gold closed the first quarter 1 dollar higher than where it started at the first of the year, and so did silver. Hard to believe isn't  it?

In light of the above interest rate analysis,  one has to be a little sceptical of gold shooting higher when stocks fall along  with interest rates which are deflationary recessionary signals.

I understand the thinking: investors, in particular large institutions believe that these indicators will lead to the  Fed holding off tightening monetary policy, which they believe is pro inflation. But it's not. It's anti deflationary by nature. If the central banks are remaining easy, it's because they fear deflation, not because they think inflation is straight ahead.

The jump in the price of gold is a good thing  technically for gold bulls. It takes the pressure off of the downside. But if we see stock  prices and interest rates continue to move lower gold will most likely  succumb to the overwhelming deflationary recessionary trend. I still think this  is unlikely and is a hangover from the weakness of the first quarter and that the  economy will turn back up and prices will firm in the second half.

On that basis I continue to hold a core position in gold and silver mining company and added aggressively today with a close  stop to protect any downside reversal. I'm still looking to establish an aggressive position in well managed gold and silver mining companies with good prospects -- but prudently.

For more on that, see my Market Update.

Paul Nathan