Japans imposition of negative interest rates earlier this year hammered home a bullish new paradigm for gold investors: For perhaps the first time in its history, the yellow metal has a positive cost of carry.
The biggest knock against gold, after all, is that it pays no interest to its holders. But with bond investors now getting back less money than they put down to buy sovereign debt, golds prospects are inherently brighter as more and more banks institute negative rates.
And the world just hit a grim new milestone, with almost a third of all global government debt now producing a negative yield.
Negativity rising sharply, Fitch says: The amount of global sovereign debt with negative yields surpassed $10 trillion for the first time in May, The Wall Street Journal reported June 2, citing data from Fitch Ratings.
The measure stood at $10.4 trillion on May 31, up 5% from $9.9 trillion on April 25, when the rating agency last measured the amount, according to a Thursday report. It is spread across 14 countries, with Japan by far the largest source of negative-yielding bonds. Of the total, $7.3 trillion was long-term debt and $3.1 trillion was short-term debt.
With the amount of negative-yielding debt up sharply this year because of unconventional central-bank policies, investors have been pushed into other markets, particularly U.S. Treasurys, which have positive yields that are still relatively high, The WSJ added.
However, some traders in the options market have signaled concern that even short-term U.S. yields could fall below zero.
Certain to lose money at maturity: And Germany hit a sour milestone of its own this week, with the average yield on its sovereign bonds falling below zero as the phenomenon of negative interest rates intensifies across global financial markets, the Financial Times noted.
Even corporate debt is not immune, with yields on $36 billion worth of short-term bonds sold by groups including Johnson & Johnson, General Electric, LVMH Mot Hennessy, Louis Vuitton and Philip Morris now trading negatively, according to a separate FT report.
Investors buying negative-yielding debt are certain to lose money if they hold the bonds to maturity, the FT confirmed. Well, then, why hold it at all when there is an alternative? And that alternative is not ephemeral, unbacked paper but a hard asset that an investor can actually hold: gold.
When you have to pay to have your money stored, all of a sudden it makes sense to own gold, because even though the metal doesnt pay you anything, at least you dont have to pay, strategist Alan Gayle of RidgeWorth Investments told Bloomberg on May 26.
When investors start to wake up and smell the coffee, that capital has to go somewhere. Even a small portion of the $10 trillion already deployed into negative-yielding bonds would do wonders for gold if reallocated into the yellow metal.