(The Burning Platform)—When the Fed raises interest rates to curb inflation, ripple effects spread across the economy. Some of the impacts are negative (especially if you owe a lot of money), but others are positive for savers.

Today, let’s take a break from exploring the downsides of higher interest rates. Let’s focus on the positive.

If you’re prudent, you undoubtedly have some extra money tucked away in a savings account at a bank or credit union. Savings accounts are typically used for household emergency funds, cash set aside for short-term expenses like a big vacation, a significant home improvement (or down payment on a home) – that sort of thing.

Recently, setting aside cash in a savings account got a lot more attractive:

Not long ago, it was common to earn low returns on cash – less than 1%.

But after the Federal Reserve embarked on a series of interest rate increases to tamp down inflation, that has changed. Now, investors may get as much as 5% or more interest on their savings – the most they have been able to earn in about 15 years.

“What I hear from advisors these days is the phrase, ‘This is real money now,’” said Michael Halloran…

Just one year ago, Dr. Ron Paul calculated exactly how much the Fed’s interest rate repression was costing us. For example:

…banks are paying less than 1% APY on CDs and savings accounts, on average, while inflation is 9.1%.

What a difference a year makes!

At 5% APY (annual percentage yield, or “yield”), the most generous savings accounts are actually outperforming inflation – most recently reported at 3.7% year-over-year.

• A positive after-inflation return on your cash?
• Liquidity on demand?
• Insured by the FDIC?
• What’s not to like?

If only we could take these benefits at face value…

The drawbacks of savings accounts

Unfortunately, offering 5% APY on your savings isn’t something banks are just offering you for free. If you have an existing savings account, don’t expect a complimentary upgrade to your APY. For example, here’s the current yield on my personal savings account:

You’ll probably have to shop around, but if you do you can find an account offering 4.75%-5.25% APY. But should you? Switching banks (even opening a new savings account online) can be a hassle. Is it worth it? Well, there are two reasons banks offer high yields on savings accounts:

1. To attract new customers, and entice them into opening a savings account (which, they hope, will lead to a profitable relationship)
2. To attract new deposits, which they desperately need

Don’t forget, the entire banking sector is still dealing with unrealized losses on their reserves – more today than in March, when SVB and Signature banks suddenly failed:

Banks can borrow money from the Federal Reserve BTFP fund, which costs them 5.55% today. Why wouldn’t they offer savers a bit less to fill a hole on their balance sheets? From that perspective, a 5% APY savings account rate doesn’t look quite so attractive…

Even if the worst occurred – you opened a savings account with a bank that promptly collapsed – your deposit would be insured by the FDIC. Right?

…there are limits to those protections. Depositors generally have up to $250,000 of coverage per bank, per account ownership category through the FDIC.

When banking troubles cropped up earlier this year, the federal government stepped in as a backstop regardless of those limits. But savers should not count on that happening again.

Stay under those FDIC insurance limits, folks!

Fortunately, the FDIC maintains a significant deposit insurance fund (DIF). Unfortunately, the DIF has only $116 billion on-hand. That sounds like a lot, until we compare it to the $17.2 trillion currently on deposit in banks nationwide (about 40% or $7 trillion of that total is uninsured). If the deposit insurance fund is depleted, the Federal Reserve can always print more money to make up the difference. Which would cause inflation, naturally… Even in a worst-case scenario, you’d get your money back eventually, but you might need to wait on an act of Congress to make it happen.

But we’ve been starved for yield on our savings for so long, a 5% APY might be enough to encourage even the most skeptical to open up a savings account.

One more point to ponder – if we factor inflation into our calculations, how much after-inflation yield are we earning? Less than you’d think…

“Real” returns or a mirage?

The number one enemy of cash is inflation.

The phrase “real return” means what’s left over after subtracting the corrosive effects of inflation on your cash. As I said earlier, the official CPI is currently 3.7% per year.

Pause for just a moment and ask yourself whether that 3.7% increase in the cost of living accurately reflects your own expenses? For most Americans, the answer is a resounding No. That’s because CPI or “headline inflation” isn’t terribly accurate.

Absent a deeper dive into the politics of inflation calculations, consider this. If we were to use the Federal Reserve’s own price index procedures from the 1980s (before substitution hocus-pocus were allowed to corrupt the data), inflation would measure about 12.5%.

That would also mean any cash stashed in a 5% APY savings account would actually cost you 7.5% of your purchasing power…

Listen: Liquidity is great. Insurance on up to $250,000 in savings? Outstanding. Even when a bank collapses, the FDIC generally figures out a way to make insured deposits available within a day or two. Are those privileges worth a -7.5% return on investment? Maybe it’s time to consider a more inflation-resistant form of saving…

Inflation burns up dollars, but it can’t touch this

Whether you put your hard-earned cash in a savings account is totally up to you. So long as you’re aware of how much you’re really paying for liquidity and deposit insurance.

Savings accounts aren’t the only solution, though.

Consider the benefits of physical gold and silver. They’re not only resistant to inflation, they’re also historical safe-haven assets. Instead of a misleading APY, physical precious metals offer you long-term stability that can’t be inflated away. Gold and silver are almost as liquid as cash in the bank. And your physical precious metals are your property (unlike a bank deposit, which is a bank liability or IOU to you, the customer). Gold and silver cannot default, cannot go bankrupt. Ever.

Savings accounts are supposed to offer low risk and low reward. Right now, it seems to me they offer a combination of low risk and guaranteed loss of purchasing power instead.

There are two ways to own gold and silver. You can purchase them and have them delivered to your home. Or, you can use the retirement savings funds you’ve already set aside for your future to open a Precious Metals IRA.

If inflation is bad, why do we have an inflation goal?

Egon von Greyerz recently analyzed the state of economic affairs. From gold to climate, a lot of the points he raises are striking, yet not likely to be covered by any mainstream outlet. His discussion of inflation, or rather its source, caught my eye.

We know the Federal Reserve has an inflation target of 2% annually. In recent years, they’ve missed that target consistently (from 390% over to today’s mere 60% over target). Inflation has been so high for so long that even getting back to 2% feels like victory.

von Greyerz addresses the elephant in the room: Why is the inflation rate not 0%? We should also address the most frightening of boogeymen, too… Why is deflation so terrifying?

First, you must understand that a 2% inflation target is a recipe for deliberate, sustained wealth destruction. So you’d think there would be a very compelling reason behind it! Yet when asked this very question recently in a Senate hearing, Fed Chair Jerome Powell said:

The 2% is globally agreed between all major central banks as a target.

When asked how that is beneficial to the people, Powell went on to reveal the true depths of the Federal Reserve’s policy:

I will tell you how it does, I guess it is obviously not obvious how that is… To have people believe that it will go back to 2% anchors inflation there.

Let me translate the Chairman’s responses into English:

• 2% inflation is our target because it’s everyone else’s target
• There’s no actual benefit to 2% inflation beyond expectations

If this doesn’t make you question the competence of those involved in managing your money, then nothing will.

Since understanding the alleged benefits of 2% inflation is “obviously not obvious,” here’s a brief Q&A:

What causes inflation?

An increase in the supply of currency – which, by itself, decreases the currency’s purchasing power. Rising prices are a symptom of inflation rather than inflation itself.

Is inflation going down?

No, but recently inflation is going up less quickly. Remember, inflation is cumulative. After a year of 9% inflation, your currency has lost 9% of its purchasing power permanently. Even if inflation drops to 0%, that lost 9% is gone forever.

How does raising interest rates help inflation?

Higher interest rates make borrowing more expensive and encourage saving rather than spending. Less credit and more saving decreases overall economic activity by reducing the amount of currency chasing goods and services. Higher interest rates don’t, by themselves, reduce the overall supply of currency, but they do discourage spending.

Why is deflation bad?

Deflation is literally a reduction in the circulating currency supply – which increases the purchasing power of the currency. That may not sound bad to you (unless you have a lot of debt). Deflation encourages saving money, which lowers overall economic activity. Worse, though, deflation forces debtors to use more valuable currency to repay their creditors. The more you owe, the worse deflation is for you – and if you owe, say, $32 trillion, it’s a recipe for disaster… Just as inflation encourages borrowing and spending, deflation encourages the opposite.

To continue: von Greyerz believes the world is turning away from IOU-based currencies. The reason for this is straightforward: the debt is simply becoming unsustainable, and it gets worse the higher up we go from the average citizen to governments themselves. One might say that the world’s credit score is becoming insufficient to support the current, debt-based global economy.

This is a key reason BRICS nations are interested in creating a commodity-backed currency. A commodity has intrinsic value – it’s desirable because of the thing itself, rather than because of a promise from a government. In this way, von Greyerz also inadvertently explains why BRICS economies want to rule the world all of a sudden. In a shift away from unbacked paper money and towards tangible assets, these global commodities exporters are real economic powerhouses.

The transition away from unbacked, debt-based liability currency to commodities-backed money won’t be easy. Expect a decade of high inflation, high interest rates, geopolitical turbulence and economic volatility. To navigate this “new normal,” von Greyerz recommends physical gold and silver (as well as a few industrial commodities) as the only assets likely to endure the chaotic decade ahead.

Central bank gold buying still up (if we exclude profit-taking)

Central bank gold demand down 39% vs. last year? Such a claim merits scrutiny.

On the heels of a record year (central banks bought 1,136 tons of gold in 2022), why the sudden about-face?

As IMF data reveals, three countries are responsible for the sell-off: Turkey, Kazakhstan and Uzbekistan.

Turkey was the largest gold buyer last year with over 125 tons, but has reportedly sold 59 tons in the first five months of this year. Turkey’s case has already been covered in full. The nation is selling gold bullion to prop up its currency. The results, so far, have been mixed.

Kazakhstan and Uzbekistan’s cases are less clear, with the former having sold 35 tons and the later 27 tons of gold. Notably, unlike Turkey, they were also net sellers last year. Both nations have large gold reserves (#15 and #17 largest) in relation to their economies. I suspect the motive is simply profit-taking.

Who are the buyers, then? Singapore bought 69 tons and China 68 tons during the period. We’ve covered in reasonable depth how China’s gold-buying reports appear to be a message to the world. It has been suspected for the longest time that China’s real holdings far exceed the reported figure, and that the country isn’t particularly concerned with reporting its gold purchases to the public.

This narrative is especially strengthened when one takes into account that most of the 1,136 tons were from countries unrevealed, with China being one of the few willing to disclose its central bank policy. Singapore has retained a similar air of secrecy – any attempt to get an explanation from its central bank was met with vague or secretive responses.

Not the case with Poland, this year’s third-largest gold buyer (and world’s #22 largest gold reserve). Sharing borders with Ukraine and Belarus, I’m personally not at all surprised to see Poland adding more gold to its reserves.

In times of geopolitical uncertainty, gold as always serves as the ultimate form of payment or collateral. Let’s hope the Ukraine conflict doesn’t spread to Poland – but if it does, the nation will, at least, have taken steps to diversify its savings with a heavy allocation to gold as insurance against crisis.

The collapse of the lira and Turkey’s massive consumer gold demand

It feels like any story of Turkish gold selling should be accompanied by the full economic picture. For example, the 165 tons of gold sold by the country within three months were actually sold to Turkish citizens. This was necessary to meet local demand as the country banned gold imports amid trade disagreements with the European Union.

Surprising, isn’t it? The biggest central bank gold seller this year has sold its gold reserves to its own citizens!

But there’s quite a bit more to the story of Turkey’s economic weirdness. Erdogan seems determined to play Russian roulette with Turkey’s economy. Instead of raising interest rates to fight rising prices, he has instead lowered them. Turkey currently misses the technical definition of hyperinflation by a whisker, after enduring 50% or higher monthly price increases for all of 2022. The most recent report puts inflation at a blistering 48% monthly.

Economic insanity aside, the earthquake in Turkey reminded us of something that doesn’t get mentioned often enough in the gold market: Gold and real estate are both tangible assets, but they aren’t the same. The latter comes with so much risk, including counterparty and environmental, that it can’t be classified with gold. Both are tangible assets with intrinsic value – beyond that, they’re completely different.

Unsurprisingly, Turkish citizens loaded up on gold bars and gold coins. (Unlike gold jewelry, these are classified as “gold for investment.”) In fact, the world’s 19^th largest economy accounted for 1/3 of global demand for investment gold in the second quarter of the year.

The Turkish people are suffering economically – but fortunately, they’re spending their money as quickly as they can to secure a lasting store of value with gold.

This is why most economists have ignored discussing gold recently. They are still thinking in terms of near-future repercussions and forecasts; the level of gold buying by central banks should mean markets are tanking already. Since they are not, economists have dismissed the gold buying as anomalous. What they’re missing, whether out of intent or ignorance, is that central banks are buying gold in preparation for the burgeoning Central Bank Digital Currencies.

It behooves Americans to follow the real experts. While most economists are still bullish on gold, they are not nearly bullish enough when we consider the trajectory of worldwide economies, de-dollarization, CBDCs, and inflation that continues to rise despite ongoing rate hikes. The central banks seem to know what many economists ignore, that precious metals are poised to be one of the best (and possibly only) major asset class that doesn’t bottom out if/when the “economic crap” hits the fan.

The article below by Peter Reagan breaks down what’s been happening so far. It’s no secret that we’re huge fans of physical precious metals in your safe or backing your retirement accounts, but the prospect of these gold surges continuing is not something we want to hear. Yes, it’s great for our customers but unfortunately it means the vast majority of Americans who do not have the cash or retirement accounts to put into precious metals will suffer. We do NOT delight in the upcoming events that could send gold and silver skyrocketing, but we’ll help people prepare for them nonetheless. With that said, here’s Peter Reagan…

It’s mentioned often how central banks are one of the pillars of support when it comes to gold prices. Lately, though, it seems that they’ve taken on an even more prominent role in the market.

JP Morgan’s analysis recently said that global gold investment has reached the highest level since 2012. They downplayed the role of central banks, noting that individual investors and traders have become increasingly active in the gold market. And it’s hard to argue that gold, increasingly, is becoming a mainstream rather than an “alternative” asset.

But it seems we can’t check the headlines anymore without seeing a report of central bank gold buying. Even Turkey’s decision to sell a fraction of its gold reserves (which is probably the reason 2023 central bank gold buying won’t top last year’s record number) was, counterintuitively, a story about gold demand. The Turkish central bank sold some 71 tons of gold on the domestic market, to its own citizens. Thanks to inflation, citizens have all but abandoned the lira in favor of gold. We’ve reported on the Turkish enthusiasm for gold previously so we won’t recap the nation’s struggles at length.

Still, how strange is it that the Turkish central bank, which was responsible for the nation’s near-50% inflation is now selling gold bullion? And getting paid for it in the very same lira they’d printed a couple weeks ago? Seems like the citizens of Turkey are fed up with Modern Monetary Theory, and voting against it with their wallets…

In other news, China has now extended its streak of official gold purchases for the tenth consecutive month. The 930,000 oz of gold bought in August bring the nation’s official reserves to 2,165 tons. (And, as we know, that figure is probably more than a little under-reported.)

It also shouldn’t escape us that this massive expansion of official central bank gold holdings coincides with a reduction in foreign exchange reserves by 1.38%, the lowest level since the start of the year. In simpler terms, China’s using currency to buy gold – just like you or I would.

It wasn’t that long ago that it would have been strange to find an active central banker talking about gold. Yet today, we find central banks aren’t just hoarding gold themselves, they’re actively encouraging gold ownership among their citizens.

Strange times, indeed.

Article cross-posted from Birch.