Negative interest rates have been called a game changer for gold investing, and now a new report from the World Gold Council (titled Gold in a world of negative interest rates) has reaffirmed that standpoint.
Recently introduced in Japan and already in full sway in much of Europe, negative rates take zero interest rates a step further by in effect imposing storage fees on bank depositors. The result is that cash sitting in a bank or parked in a government bond becomes an automatic losing proposition, while golds primary caveat the fact that it has no yield virtually disappears.
Because of this new and unprecedented phase in monetary policy, the World Gold Council concludes that investors should consider doubling their gold allocations amid negative interest rates.
4 reasons gold demand will rise: The WGC lists four reasons why demand for gold as a portfolio asset will structurally increase.
- Gold becomes cheaper to hold when rates are negative;
- many assets that fund managers normally would choose, such as sovereign bonds, become money losers when yields are negative;
- as a key tool in global currency ways, negative rates further undermine confidence in fiat money; and
- negative rates are an admission that more mainstream monetary-policy tools have failed, and the effects of negative rates are uncertain at best.
Although negative-interest-rate policies have never been common as official doctrines, the WGC has studied several periods in which real interest rates have been negative, and the effect on gold has been tremendous.
Gold returns twice as high: What is a real interest rate? Its calculated by subtracting the inflation rate (as measured by the Consumer Price Index) from the Feds official interest rate (in this case represented by the 12-month constant maturity T-bill).
Under real negative rates, gold has thrived. When real rates are negative, gold returns tend to be twice as high as the long-term average, the council concluded.
Negative rates thus bolster the case for gold, most importantly for central banks, which already have been on a bullion-buying tear for about the past decade. Because these banks usually invest in a more limited set of assets, gold becomes an even more solid investment.
The prolonged presence of low (and now even negative) rates has fundamentally altered the way investors should think about risk and may result in a broader use of assets like gold to manage their portfolios more effectively and preserve their wealth over the long run, the WGC report said.