Today
40-year veteran, Robert Fitzwilson, wrote the following piece
exclusively for King World News. Fitzwilson, who is founder of The
Portola Group, urges, “The reason it is so
critical that investors understand the reality of what is happening in
both the cash and securities markets is because whether you have $100 or
$100 million, it is imperative that your savings be converted into real
assets, particularly gold and silver.”
Below is Fitzwilson’s exclusive piece for KWN:
“We have characterized cash
as being a zero-coupon, perpetual Treasury instrument. It has no
inherent coupon nor does it have a maturity date. We know how cash
trades. It is always issued and remains at par ($1 or 100 cents per
dollar). The quoted price of it will change relative to cash issued by
other countries and alternative currencies such as precious metals, but
the “price” always remains at $1. Distinguishing price from value, the
latter will also fluctuate over time in terms of purchasing power.
However, the value of the dollar has been in a virtual nosedive for the
last 100 years....
“We decided to look at the actual zero-coupon Treasury (ZCT) securities last week. On Friday, the 10-Year version of the ZCT was available to buy for roughly 80% of par. In simple terms, this means that one would pay $.80 per dollar on the purchase. If held to the maturity date in 2023, the buyer would receive no income from a coupon payment. While the quoted price will fluctuate over the remaining time to maturity, the price will inexorably rise to par as the maturity date approaches. The gap between the $.80 paid and the $1.00 received from the Treasury at redemption for par would be the effective interest on the investment. On Friday, that compound, coupon-equivalent return was about 2.1% before taxes and before inflation.
For the 20-Year and 30-Year ZCTs, the prices as of Friday were $.55 and $.38, respectively. The yields-to-maturity (the compound interest rate of return) were roughly 3.1% and 3.3%, respectively. That is all. Again, that is before any taxes and inflation.
We are told that the inflation rate is running in the 2-3% range in the United States. Since most of us have to buy things, we also know that the actual rate is running at a much higher level. Shadowstats suggests the correct rate is in the high single digits or the low double digits when traditional methodologies are utilized. Outside of the United States in countries that spend more of their money on food and energy, their experience suggests that the inflation rate for consumers is closer to the Shadowstats estimate.
Turning back to the zero-coupon bonds, a buyer on Friday of the 30-Year version was purchasing a contract with a mathematical compound return of about 3% over the next 30 years. If we project that the current inflation rate of 3% will remain the same for the next 30 years (which we are not), the owner of the contract is locking in a real rate of return of zero. That is the absolute best that can happen. It makes the incredible assumption that everything stays the same, yet allows for a zero return on capital. It gives a new meaning to a ZCT, a zero-return security.
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For the 20-Year and 30-Year ZCTs, the prices as of Friday were $.55 and $.38, respectively. The yields-to-maturity (the compound interest rate of return) were roughly 3.1% and 3.3%, respectively. That is all. Again, that is before any taxes and inflation.
We are told that the inflation rate is running in the 2-3% range in the United States. Since most of us have to buy things, we also know that the actual rate is running at a much higher level. Shadowstats suggests the correct rate is in the high single digits or the low double digits when traditional methodologies are utilized. Outside of the United States in countries that spend more of their money on food and energy, their experience suggests that the inflation rate for consumers is closer to the Shadowstats estimate.
Turning back to the zero-coupon bonds, a buyer on Friday of the 30-Year version was purchasing a contract with a mathematical compound return of about 3% over the next 30 years. If we project that the current inflation rate of 3% will remain the same for the next 30 years (which we are not), the owner of the contract is locking in a real rate of return of zero. That is the absolute best that can happen. It makes the incredible assumption that everything stays the same, yet allows for a zero return on capital. It gives a new meaning to a ZCT, a zero-return security.
Read More