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Negative Real Rates Could Push Precious Metals Prices Higher

Isaac Nuriani    |
Jul 9, 2021

Recent sharp spikes in the Consumer Price Index over the last two months have prompted talk among some at the Federal Reserve that interest rates may have to be pushed up beginning in 2023 or possibly as early as 2022.1 Inflation can be good news for precious metals, but a central bank that raises rates in an effort to aggressively chase down inflation sometimes can complicate the outlook for gold and silver.

Higher rates can mean better returns on interest-bearing assets, such as bank certificates of deposit (CDs) and bond funds. This condition raises the possibility some savers who otherwise might be interested in gold’s inflation-fighting potential could give a second look to CDs or similar vehicles.

As long as rates remain at or near all-time lows, however, it’s likely precious metals will stand out amid an inflationary climate. That is attributable not only to the fact that nominal interest rates are low, but that what are called real interest rates – the nominal rate minus the inflation rate – actually are negative.

Yes, there have been concerns raised about gold’s near-term prospects based on the possibility interest rates may be increased sooner rather than later. But I think those concerns are overblown. There are several obstacles to a higher-rate climate, including the fact the economic recovery from the pandemic remains elusive. Another obstacle: Even incrementally higher rates could put tremendous pressure on a nation that is not only highly leveraged but seeks to go much deeper in debt in the years ahead.

Interest rates that don’t go up from here likely mean negative real rates for the foreseeable future. If negative real rates persist, it could prove especially beneficial to gold and silver. In fact, one investment bank says real rates in the current climate will be the principal reason metals climb higher in the months ahead.

Powell: Rates Pandemic Recovery Still “Has a Long Way to Go”

Despite talk the Fed might raise interest rates beginning as early as 2022, you get the sense America’s central bank would prefer to leave rates where they are.

One of the Federal Reserve’s biggest priorities is a return to full employment, and it previously has said that condition must be met before it would raise interest rates.2 But the unemployment rate in the era of the post-COVID recovery has proven a challenge to tame. The figure for June was 5.9%.3 That is, of course, much lower than the 14.8% rate we saw in April 2020, but much higher than the 3.5% rate of February 2020, just before the pandemic reached critical mass. Moreover, the June rate is actually 0.1% higher than May’s unemployment rate, further underscoring the unevenness of the pandemic recovery.

Another related challenge on the horizon is whether it can be said we’re genuinely in a post-COVID period. After it seemed as though there finally was a light at the end of the pandemic tunnel, the highly infectious Delta variant of coronavirus is now taking center stage. In four states, the Delta variant is now the cause of 80% of new COVID-19 cases.4

It’s much too early to say whether this variant or any other could prompt a resurgence in mass lockdowns and other measures that previously held hostage much of the nation’s economy. But it potentially could cause a “slowing of getting back to our pre-pandemic level of economic activity and employment,” according to Erica Groshen, senior economics advisor at the Cornell University School of Industrial and Labor Relations.5 And it is a return to that pre-pandemic level of activity that Federal Reserve Chairman Jerome Powell and others want to see before even considering a bump in rates. On that note, Powell himself tamped down recent rate-increase talks in a recent appearance before the House Select Subcommittee on the Coronavirus Crisis, saying, “We have a long way to go” in the pandemic’s economic recovery.6

Analyst: Massive Deficits and Debt Will Force Fed to Stay Put on Rates

The prospects of a persistently murky economic recovery are not the only reasons some experts think record-low rates will remain in place. Another is the country’s massive debt load, expected to only grow bigger in the years ahead courtesy of the Biden administration’s ambitious spending plans. There are real concerns about the government’s ability to service all of that debt if rates are raised even a little.

In a recent article for Daily Reckoning – revealingly titled “The Fed Can’t Tighten” – Chartered Financial Analyst Dan Amoss makes a compelling case that recent Fed talk about raising interest rates is much ado about nothing.7 Referring to the prospect of enormous spending levels “paid for” by trillions-per-year deficits, Amoss notes the following: “The bottom line is that federal deficits will remain extremely high. In order to fund these deficits at rates that the government (and the broader financial system) can afford, continued Fed QE will be seen as necessary.”

“The unsustainable nature of public and private sector spending, savings, debt, and deficits means that a ton of pressure is going to fall on the Fed to plug gaps,” Amoss said later. “The Fed will be forced into a state of more or less permanent ease, almost regardless of the reported inflation rate.”

In a late-May article for Barron’s, Lisa Beilfuss echoed the same debt-related challenges facing the Fed when it comes to prospective interest-rate increases.8 Beilfuss made particular note of the economy’s inability to handle the previous rate-tightening cycle, when rate hikes in 2018 culminated at a modest target range of 2.25% to 2.5% before the Fed was forced to resume loosening.

“Consider the fact that the Fed was unable to lift rates above 2.5% during the last tightening cycle and had cut rates in several meetings before the pandemic prompted its emergency actions early last year,” Beilfuss wrote. “Since then, U.S. households, businesses, and the federal government have grown only more indebted.”

“The upshot: tightening, via both [Fed asset-purchase] tapering and interest-rate increases, may be much further away than the market currently expects,” Beilfuss later speculated.

CIBC: “Real Rates Will Be the Bigger Driver” of Metals This Year

The longer rate-tightening remains at bay, the longer real rates will remain around – or even below – zero. Global investment bank Canadian Imperial Bank of Commerce (CIBC) recently went on the record with its assessment that continued anemia in real rates is going to be the true catalyst of broadly higher metals prices in the near term.9

While inflation will undoubtedly provide a boost to gold, in our view, real rates will continue to be the bigger driver for outperformance over the coming year. History shows that gold doesn’t seem to care and, in fact, can keep outperforming until real rates post a significant recovery. That recovery still seems very far off at this stage.

Continuing, CIBC analysts said:

Given our expectations for inflation to increase over the coming months and for pressure on the Fed to walk a fine line between hiking rates to manage inflation vs. supporting economic growth, we continue to believe that gold and silver prices will continue to climb over the coming quarters.

As others have suggested, CIBC is of the opinion that both the current and anticipated future deficit picture is a profound obstacle to the Fed boosting rates.

“Overall, macro liquidity remains high and that trend isn’t expected to change anytime soon. Further, U.S. President Joe Biden has proposed a $6 trillion spending plan, resulting in annual deficits of more than $1.3 trillion over the next decade,” CIBC analysts wrote. “It is clear that fiscal stimulus is here to stay, leaving the Federal Reserve in a tough spot.”


1 Maggie Fitzgerald, CNBC.com, “The Federal Reserve now forecasts at least two rate hikes by the end of 2023” (June 16, 2021, accessed 7/8/21).
2 Jeff Cox, CNBC.com, “Fed’s Brainard says the economy is improving but is still ‘far from’ where it needs to be” (April 7, 2021, accessed 7/8/21).
3 Kimberly Amadeo, The Balance, “What Is the Current US Unemployment Rate?” (July 3, 2021, accessed 7/8/21).
4 Catherine Schuster-Bruce, Business Insider, “The Delta variant is causing more than 80% of new COVID-19 infections in 4 US states, including 96% of new cases in Missouri” (July 6, 2021, accessed 7/8/21).
5 Dylan Miettinen, Marketplace, “How worried should we be about the COVID-19 Delta variant?” (July 2, 2021, accessed 7/8/21).
6 Brian Cheung, Yahoo News, “Powell: ‘Long way to go’ on US economic recovery” (June 22, 2021, accessed 7/8/21).
7 Dan Amoss, Daily Reckoning, “The Fed Can’t Tighten” (July 1, 2021, accessed 7/8/21).
8 Lisa Beilfuss, Barron’s, “What if the Fed Can’t Raise Interest Rates? Why Near-Zero Is the New Normal.” (May 26, 2021, accessed 7/8/21).
9 Neils Christensen, Kitco.com, “Gold price still has a path to $2,000, silver to $31 – CIBC” (June 24, 2021, accessed 7/8/21).

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