Michael Pento Turns Gold-Skeptic Argument On Its Head

One of the two main talking points from gold skeptics is that gold pays no interest. If storage costs are included, gold has a slight negative carry unless the gold is tucked into a desk drawer or some such. Even if the storage carry is zero, there are still spreads and commission costs to deal with; those make the carry negative on an accrual basis. (In other words, if the commission and/or spread costs are applied to the investment over the holding period, rather than treated as clips on the purchase and sale themselves, you get a negative carry.) That same treatment adds an accrued cost-of-carry to any storage costs that have to be met with cash, or perhaps gold.

Pento, though, notes that the slight negative carry on gold can be worsted by negative real interest rates on Treasury securities:

Currently one-year Treasury notes yield 0.39%. The Consumer Price Index, by contrast, is rising at an annual rate of 2.1%. Adding the inflation and interest rate data together indicates that investors in sovereign U.S. debt will suffer a 1.71% negative yield--and that's before taxes!

From what I know of storage costs, spreads and commissions, the only kind of gold whose negative carry is that large would be small coins, or larger coins held for a short time. A large gold investment held on to for some time doesn't have that kind of carry.


I wish I could brush off that skeptics' talking point as just an expression of animosity to gold, but it has a lot of mainstream appeal. Were that not the case, there wouldn't be such an evident correlation between gold bull runs and negative real interest rates. When it comes to total demand, mainstream money always outweighs alternative money. When the mainstream goes for gold in a big way, prompted by the combination of negative real interest rates and rising inflation, gold does get ahead of itself in a big way.

One question to ponder: the tie between gold and inflation has been successfully debunked, 'tis true, but would it have been if there had not been any bubble in the late 1970s? The tie would have been much better, except for that time in the late '90s when the stock market was all the rage and gold was forgotten about.