If you take CPI data at face value, the current real rate is between 1.6 and 1.25 percent (That’s the Fed funds rate minus the current CPI of 2.9 percent).

If the Federal Reserve cuts its rate by 25 basis points, as expected, the average real rate will fall below 1 percent. Two or three more cuts will result in a negative real rate. And if price inflation continues to increase, negative rates will manifest even faster.

Keep in mind that the true price inflation rate is higher than the CPI indicates. The government revised the CPI formula in the 1990s so that it understates the actual rise in prices. Based on the formula used in the 1970s, CPI is closer to double the official numbers. So, given the current BLS estimate of 2.9 percent, under the old formula, you’d be looking at CPI closer to 6 percent. In other words, real rates may well already be negative.

And that means there is no opportunity cost to holding gold or silver.

This is extremely bullish for precious metals. It explains why their prices have rallied every time the Fed has hinted at cutting. And it’s one of the reasons many analysts believe the gold and silver rally has plenty of legs left.

The truth is (although they would never say it out loud), the central bankers over at the Federal Reserve prefer negative real rates because it softens the government’s massive debt burden.