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The Hard Assets Alliance Blog

The Breakdown in This Ratio Says Deflation Is Likely to Worsen

Ratio analysis has its pros and cons, but when two assets that normally have a strong correlation suddenly break down, it’s obvious something is wrong.

That’s exactly what has happened with the gold-silver ratio and the CPI.

As uber fund manager Dan Tapiero shows in this video, these two assets have always had a strong correlation—except leading into the 2008/2009 crisis. As Dan says, “We all know what happened then.”

Here’s the chart showing the sudden and drastic separation.

One might argue that the gold-silver ratio could go up, but the point is that the correlation is already at an extreme. If the two assets close the gap and return to normal, deflation could increase dramatically.

The process might already be underway

The German CPI numbers recently surprised to the downside, the Japan CPI is low, and the Chinese PPI has been negative four years.

If central bankers continue to implement negative rates to combat deflation, it could be devastating to the banking industry. Just look at the banks in Sweden; they’ve reported losses every quarter since negative rates began because they refuse to bring deposits below zero. Why? Because capital would fly out the door.

A further increase in negative rates would be very positive for gold, despite the fact that it’s soared year to date. If US banks try to pass negative rates onto depositors, many would pull money out and buy gold. Gold earns zero interest—but that beats getting charged just to hold your money in the bank.

Watch the 5-minute interview below:

Why you should hold gold outside the banking system

Since banks are impacted so harshly in a negative rate environment, it may be wise to not hold your gold in the banking system. As the banks experience strain, so do their assets, including any gold they hold such as a bullion ETF.

If it feels like something is wrong, that’s because a negative rate policy is not normal central banker behavior. You have to look at other extremes in history to find similar actions.

In fact, this policy is the primary reason gold has performed so well. And with central bankers running out of options, watch why hedge fund manager Dan Tapiero believes this policy will hurt the banks and push gold markedly higher.

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