I have often discussed and written about what we call the "transfer of wealth." Quite simply, I would suggest that in low-interest-rate environments, where central banks have control of printed Fiat currency, we are being sold a complete falsehood about the benefit of low-interest rates on our wealth.
We have long maintained that low interest rates, which remain artificially low at this point, continue to give an unfair advantage to the wealthy as we struggle in many cases to find our footing in Canada. Let me be more specific and make no mistake: I do have a bias, but it is one that for the past 20 years has been positive. I am among the firmest of believers that ownership of hard assets, especially in physical gold and silver, will continue to produce positive wealth effects for those astute enough to own them as part of a proper wealth strategy.
The Dutch central bank analyzed the data of twelve advanced economies in a timeline ranging from 1920 to 2015. The 95 years of data show low interest rates result in the rich getting a more significant share of a country's wealth. The study is here: https://www.dnb.nl/media/jbybr2et/working-paper-no-632_tcm47-383633.pdf
The top ten percent of the wealthiest households gained a more significant share of wealth. They found a more "powerful" impact in the tails of the income distribution. In other words, higher wealth brackets received a more significant share of the cut of total wealth during low-interest rate periods.
It gets more prominent at the top of the income division, too, as the data showed. The study found the top one percent of incomes capture one to six percent more of the national wealth. The research spanned almost 100 years through every conceivable kind of low-interest environment and proves central bankers are well aware of their contribution to wealth inequality. After all, they are one of the biggest drivers of it.
The majority of this unevenness is driven primarily by low-interest rates helping to produce much higher asset prices. (Think Real Estate, and pretty much everything we touch right now)
The problem is that the average Joe is persuaded to believe that higher interest rates are harmful. We all believe that if interest rates rise and our cost of debt rises, this would be a killer of wealth, right? Who wants to spend more money servicing debt? However, the Dutch Central bank found that this was, in fact, not the case. The statistics demonstrated that higher interest rates helped reverse the share of wealth held by the top one percent. In other words, you and I may pay a few more dollars on a loan, but the wealth inequality is smaller. The study actually showed the opposite. We have a higher quality of life during times where interest rates are higher. Of course, many people don't care about their qualify of life. They just want to have slightly more money than their friends and neighbours.
The Dutch Central bank's research is unlikely to shock anyone in finance that's picked up a book in the past ten years or those that read this and are already owners of gold and silver. I have discussed the "transfer of wealth" ad nausea since I started writing back in 2005 and taking to the weekly airwaves in 2008. But, it may come as a surprise to the general population though. They have been sold on the narrative lower interest rates will improve their wealth. By borrowing future income on the cheap, they can spend more on things today. Wealthier people generally sell those things. Middle-class people get access to more debt, and the rich collect that debt. Super complicated and challenging to understand, apparently.
Most people are so fixated on earning a couple of extra dollars that they are unaware of their relative position. Yes, low-interest rates give us a shot at buying something relatively affordable, such in the case of real estate. You might believe, as an example, a bungalow for a screaming deal of $700,000 in 2019, which now has a price tag of $1.8 million in just over a year, represents a huge win. However, you're still living in a bungalow. Meanwhile, a wealthy person now lives in a ten-bedroom mansion with an 8-digit price tag.
We tend not to think about wealth this way but to demonstrate it at its essence; it's simply a moving goal post. You are not better off because everything around you costs that much more. You didn't step out of your middle class; you merely moved sideways.
So why is this important? Well, as it relates to wealth, there is simply more to the picture. In last week's Hard Money episode (Here: https://www.youtube.com/watch?v=w0mtt6MEA58), we had the distinct pleasure of interviewing Asif Khan, a qualified real estate agent and broker with re/max. However, it was challenging for me to get at the heart of the existing problem that low-interest rates have caused. We have created a real estate buying frenzy filled up with individuals who should not and could not otherwise in normal circumstances participate in this boom. Asif was over-optimistic and for a good reason, as he believed these low rates would last possibly years to come.
When low-interest rates end, and they will end sooner rather than later, who will be left holding the incredible amount of debt? Unfortunately, it will not be the wealthy. It will be the average individual. As a result, they will experience additional disproportionate raiding of their wealth as home prices either crash or as the cost of borrowing rises to the point that the individual can no longer afford to hold on to the mortgage and will be forced to foreclose.
You may be asking that if I believe this, what is the solution to making sure this doesn't happen to me? At this point, wealth should be more diversified. It should include all types of assets, including a range of hard ones.
Many reading this will have already entered the real estate market somehow, either speculatively or as a secondary income producer. To those, I would say that there is a need to balance your wealth. We are not acting as advisers or planners or central bankers, but Delta Harbour Assets practice what they preach.
If you own stocks, bonds, cash and real estate as part of your wealth strategy, then consider taking this a step further by diversifying your holdings using the time-tested assets of physical gold and silver. The truth is that gold and silver have performed in many instances far better on average over a much more extended period than housing. They do not involve lawyers, tedious paperwork, electricians, builders, taxes, renters, person-hours, clogged toilets, upgrades, constant phone calls to get your rent cheque or other inconvenient aspects of homeownership.
What gold and silver do represent is the last bastion of private wealth. Wealth, which can be transported around the world, stored very conveniently and privately by the average individual. Both gold and silver have, in fact, averaged 10% or greater for the better part of the last 20 years in both US and Canadian dollar terms cumulatively per year. They have a track record that is thousands of years old, and as we discussed on the show this past week, central banks hold gold. Another astonishing fact about what they say you should do versus what they actually do themselves.
The transfer of wealth is severe. I am not saying this as a selling tool or to strong-arm somebody into something they shouldn't own. It is a fact, not fiction that the wealthy are becoming wealthier. It is also a fact that many of the rich currently own very diversified hard assets in their wealth strategy. Low-interest rates may well be here to stay, as Asif Khan from re/max on our weekend show suggested, but keep in mind that what appears to help you may not always be the case.
When you are ready, this opportunity to invest in a very undervalued class of assets awaits you. Gold and silver remain among the best of the best, in my humble opinion and will add value to your wealth strategy moving forward. Of course, due diligence and speaking with those you trust are always encouraged.
Yours to the penny,
Darren V. Long