All eyes are focused on this Thursdays meeting of the European Central Bank, at which President Mario Draghi is expected to unleash even more stimulus to solve the European Unions deflationary problems. Whether he will succeed is unclear, but gold stands to benefit along the way as more money printing rekindles a race to the bottom for global currencies.
A recent Bloomberg poll found that a nearly unanimous number of respondents think Draghi will take some kind of action, whether by expanding the ECBs quantitative-easing bond-buying program or by cutting interest rates further below zero, into negative territory.
As a result of continued easy money, gold stands to gain further, said BlackRocks chief investment officer for global fixed income, Rick Rieder. Gold is mispriced by two or three hundred euros if we’re going to go down the road of growing the balance sheet of the ECB, he said. Money is going to go into gold.
Rothschild sees more difficult 2016: The problem is that the world is losing faith in central bankers to stimulate the economy through the tools at their disposal. Some heavyweight players in world economics are warning of trouble ahead. No less an authority that Lord Rothschild of the famed banking dynasty and chairman of RIT Capital Partners recently revealed that his firm has cut exposure to stocks even more because market conditions have deteriorated further since 2015, he wrote. So much so that the wind is certainly not behind us; indeed we may well be in the eye of a storm.
Citing the inefficiency of QE to boost already-overpriced stocks; the economic slowdowns in China as well as the U.S. and Europe; the Middle Easts turmoil; an explosion in debt; and the possibility of a British exit, or Brexit, from the EU, Rothschild warned: Our view is that 2016 is likely to turn out to be more difficult than the second half of 2015.
Gathering storm building, says BIS: And Rothschild wasnt alone in invoking stormy metaphors to describe the current economic landscape. The central bank for central banks, otherwise known as the Bank for International Settlements (BIS), also spoke of signs of a gathering storm that has been building for a long time.
Some BIS economists warned in particular of the dangers of negative interest rates, the appearance of which only prove that central banks have dwindling options to confront todays economic crises.
Negative interest rates risk backfiring the longer and more deeply central banks in Europe and Japan venture into this unconventional monetary policy, Londons Financial Times said of the BIS research, which cautioned that it was difficult to predict how individuals or financial institutions would behave if rates were to fall further below zero or stay negative for a long period.
The viability of banks business model as financial intermediaries may be brought into question, the BIS researchers said.
Negative rates a sign of distress: Although experts are uncertain just what the effects of prolonged negative rates might have on the economy, golds reaction to such conditions is little in doubt. Several financial firms have recently weighed in on NIRP, or negative-interest-rate policies.
Coxe Advisors LLC: Speaking at the 2016 PDAC Convention in Toronto, Don Coxe also touted the virtues of gold amid NIRP and argued that pension funds would seek increased shelter in gold. Why should someone want to own a five-year bond with a negative interest rate? he asked. Ibelieve this is the single biggest new argument about why gold is going to be revalued. A negative yielding bond is not something valuable. Pension funds are going to look for something; youre telling me gold is riskier than a negative yielding bond?
HSBC: How does this play out for gold? chief metals analyst James Steel asked. Positively we think. The imposition of negative rates is a sign of distress, which is gold-bullish. Furthermore, the uncertainty surrounding the long run impact of negative rates as outlined in the BIS report is also supportive of gold. The BIS report seems to say that negative rates have brought uncertainty, especially as regards their impact on financial intermediaries, but have not delivered hoped for gains for households and businesses. This is to golds benefit.
Societe Generale: Whats happening today, in a world where safe assets have negative yields, gold by simply having zero yield has a competitive advantage to the other assets, SocGen exec Kokou Agbo-Bloua told CNBC. Thats ultimately what makes an interesting case for gold as this safety play.
Strategas Research Partners: A more widespread adoption of negative interest policies (NIRP), however, leads us to believe that bank profitability may be impaired worldwide. We now believe that the yield curve in the U.S. will remain flatter, longer than we had previously hoped. It is for this reason that we have also decided to decrease our exposure to the Financials, its analysts wrote.
Finally, it can be said that, perhaps for the first time in recorded history, gold may have a somewhat durable positive carry.We have increased our exposure to precious metals as a result.
Stay tuned for what the ECB and Draghi do this Thursday. That meeting is a leadup to the U.S. Federal Reserves March 15-16 conclave, at which Janet Yellen and her colleagues will be debating whether the U.S. economy is strong enough to withstand another rate hike. Quite possibly, NIRP could be on the Feds agenda in the not-so-distant future.