Will the Rising Tides of Negative Interest Rates Lift Gold Prices Higher?

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Last Updated on: 29th December 2020, 12:28 am

Something ominous happened in Switzerland this week. The country sold 10 year bonds at a negative interest rate – and investors, knowing they would be instantly losing money every year for the next decade, happily obliged. This deal was well received, with investors pouring 378m CHF worth of client money, potentially YOUR hard earned money into these bonds. At these rates, investors are literally paying the Swiss government for the privilege of holding onto their money. Although negative interest rate policies (NIRP) have effectively been in place for some time across much of the Eurozone in the secondary market, this is the first time in history that a developed country has issued paper with a ten year tenure at a negative rate in the primary market.

What is so wrong with the world you may ask, that investors are willingly entering into investments that offer a 100% probability of loss? The question is a valid one. Unfortunately, investors who bought into the latest Swiss 10 year issuance were actually doing so on a rational basis given the alternative of a -0.75% deposit rate! Increasingly, these are the types of unfavorable choices savers find themselves in.

Yield is Dead

This whole sorry saga emphasises one of the glaring economic realities of today – the complete lack of yield within the investment landscape. There are very few examples in history where investors and savers have been faced with such a dearth of investment opportunities. What this effectively shows is that the price of capital is being grossly distorted worldwide, allowing corporations and governments to suppress labor and entrepreneurship in favor of a vociferous speculator class with unmetered access to cheap money. The stock market is at historical highs on every metric imaginable. Asset bubbles have formed in every corner of the globe – for traditional savers these markets are not suitable anymore – the risk to reward ratio just isn’t there.

The debasement of fiat currencies is effectively a tool in propping up a system which only benefits a tiny fraction of society. Corporations and ultra high net worth individuals are among the few groups who have benefited from QE and other stimulative policies. NIRP is the tour de force of these policies. Crushing savers is no longer an unintended consequence of accommodative monetary policy – its has become the bedrock of monetary policy for many nations around the world who are more concerned with keeping the financial sector sweet from one quarter to the next.

Nearly every country across the globe is facing increasing inequality and polarization within society, and the most insidious aspect of all of these policies is that they are causing average working people to suffer the most.

Global Currency Wars are Escalating

Switzerland is not alone with its ultra stimulative policies. Australia is widely expected to unveil some form of deposit tax in its upcoming budget announcement in a move to join the ever expanding list of governments and central banks involved in the sustained devaluation of their currencies. The effects of these moves will start becoming more and more obvious in the coming months. Purchasing power in fiat terms for most people outside of the United States is slowly but surely crumbling, and business confidence appears to be on the wane. Even Germany, the powerhouse of the Eurozone economy is starting to show signs of stress.

Against this backdrop – gold is starting to gain more and more appeal as a saving vehicle. Investors are likely to increase their gold allocation in the coming year as a result – this again is a rational move given the alternatives of negative yields and bubble valuations found elsewhere.

Will NIRP help lift gold prices higher?

There are several factors in play right now which look like they could develop into substantial tailwinds for the global gold price going forward. Firstly, consensus analysts appear to be growing more timid in their forecasts for interest rates to rise this year – even the latest FOMC minutes painted a far more dovish tone being broadcast from Fed policy makers. The Fed noted a series of potential external threats, most namely from Europe, China, and Oil markets as reasons for increased deflationary concern on the domestic front. It seems increasingly unlikely that the Fed will raise interest rates as long as NIRP remains through the Eurozone core and geopolitical tensions remain high. Any increase in rate would send the dollar even higher than it currently is, exacerbating domestic deflation – something the Fed has been vehemently opposing all along. In the meantime, Gold has the potential for significant outperformance as consensus analysts starts to digest the unlikely event of any near term rate increase.

Gold looks well poised to benefit from increasing positive sentiment from savers as they begin to digest just how bereft the current investment landscape is of opportunity, and just how distorted the price of risk and capital has become globally. Gold is slowly but surely being understood more by the average investment public, the mania of previous years has subsided and there are increasing signs of a more fundamental based approach developing in the gold investment marketplace.