Gold and Negative Interest Rates: Protect Your Wealth From the Latest Central-Bank Stickup

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Gold expert Jim Rickards the author of several books including Currency Wars, The Death of Money, and The New Case for Gold recently penned a Q&A, and a Blanchard and Company client reacted with a great response. The article was about the amount of money that the Federal Reserve has stolen from American savers, which is approaching $8 billion, according to a recent study by NerdWallet.

Here is the Q&A:

How much did the Fed steal from U.S. savers? $7.5 billion and still counting. When the Federal Reserve keeps interest rates close to zero, who wins and who loses?

The losers are savers like you and me who keep some portion of their assets in the bank.

The winners are the banks that get to use our money for free and make leveraged investments in safe Treasury notes. This homegrown carry trade can produce 15% returns on equity for the banks at our expense. Artificially low interest rates are a case of stealing from savers and transferring the profits to the banks. Its like a bank robbery in reverse, where the bank robs you!

Relative to normal interest rates at this stage of a business cycle, savers have lost over $7.5 billion in interest due to the Feds policies. Some estimates put the losses much higher.

Here’s what a Blanchard client said upon reading the above: Wait until they go negative!

Negative rates seem to be popping up all over the globe as central banks struggle just to keep their respective economies stagnant, much less growing. Most people can’t imagine negative rates happening in the United States, but the Fed is pretty much close to zero interest rates as it is and has no bullets left in its monetary-policy gun.

What are negative interest rates? Its an even more draconian monetary policy than zero interest rates, in which savers receive little to nothing in interest for their bank deposits. Under negative rates, a bank customer actually gets back less than the original deposit; in effect, a depositor pays the bank a fee for the privilege of storing cash at the bank. Negative rates are a last-ditch attempt by central banks to generate inflation and stimulate the economy by forcing people to spend rather than save, since saving becomes a money-bleeding proposition.

The Fed has already reduced its projected number of interest-rate hikes in 2016 by half, from four to two, and as new economic data come in, it will likely reduce that number further. If the economy undergoes any hiccups at all, the Fed will be forced to reverse its December rate hike its first in almost a decade and be right back at zero, with a negative-interest-rate policy (NIRP) looming on the horizon.

Gold is an excellent asset to hold during both ZIRP and NIRP environments. The dollar will weaken, and virtually no safe asset will offer a rate of return. Investors will start looking for the return of their money, not a return on their money. What happens when you give a bank $100 on deposit but get only $98 back when you return for your money? The power of gold during negative rates is that it offers a better chance at a yield than cash or bonds, which are money losers under NIRP.