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Negative Interest Rates Are Positive for Gold
The European Central Bank (ECB) on Thursday announced that they were leaving their key interest rate unchanged at -0.4%, and the Bank of Japan will announce this week how low yen interest rates will go.
The world’s central banks are staging a worldwide limbo contest – how low can rates go? It started with negative rates on overnight deposits in European banks, then negative rates spread throughout Europe and into Japan earlier this year. Then, the maturities for these negative rates moved further and further out. Currently, the 50-year Swiss and 20-year Japanese government bonds each have negative yields. The prospect of locking up negative 50-year returns is mind-boggling. Nobody knows what will happen 50 years in the future, but I’d say it’s certainly likely that inflation will rise above 0% sometime before 2066!
Germany recently auctioned new 10-year government bonds with a negative yield. Britain’s 2-year government notes briefly hit negative territory and the Bank of England is widely expected to cut rates in August. Furthermore, 10-year U.S. Treasury bonds recently set record lows under 1.4% and the 30-year T-bond yield fell below 2.1%. As low as those rates are, global capital is flowing into U.S. bonds now.
For over 40 years, the rap on gold from the mainstream press and Wall Street analysts is that it doesn’t offer income. It offers no “earnings,” either, so Wall Street securities analysts say they don’t know how to calculate gold’s intrinsic value, even though gold is a long-term store of value and a reliable currency alternative in many historic civilizations for thousands of years. Ironically, a bride in India or a pensioner in Japan knows a lot more about how to value gold than a high-paid financial analyst in New York City.
Gold Offers More “Income” than $12 Trillion in Sovereign Debt
As of early July, Fitch Ratings said that $12 trillion in global debt is now yielding less than zero. That’s a huge (12.5%) increase since just the end of May, mostly due to the Brexit vote in late June. Most of the world’s $12 trillion in negative interest-rate bearing bonds are now being issued by Japan, with most of the rest emanating from Europe. With rates turning negative on two continents – and likely to remain low or negative for many years to come – the opportunity risk of lost income in owning gold is now very low.
Japan is new (since January 29) to the negative-rate limbo contest, but they currently are racing to the bottom even faster than Europe. As a result, investors in Japan have been pouring into gold. The number of Japanese gold buyers shot up 62% in the first half of 2016. Many Japanese store their gold overseas.
Negative-yield debt was only $6 trillion at the start of 2016, but you can see two big bumps in 2016 in the above chart: Japan’s plunge below zero on January 29, and the post-Brexit currency crisis in Europe since June 23. This global trend toward negative interest rates may continue for a long time. Once nations find that they can charge people to borrow money, they won’t go back to paying people high interest rates. As a result, these negative rates are a gold mine for governments, and a gold buy signal for private investors.
The mainstream press doesn’t understand this correlation yet. They keep referring to gold as an “inflation hedge” (in a time of low inflation) or a “crisis hedge” (when we’re in between crises). Those definitions still apply, but gold’s main historical role has been an all-around currency hedge. Gold has outperformed all paper currencies over time. It’s not designed to replace a wisely-selected stock market portfolio, but gold is a viable alternative to low-yielding or depreciating cash or low-yield (or negative-yielding) bonds.