Negative-yielding sovereign bonds around the world now totalat least $11.7 trillion. Switzerlands 50-year bondhas fallen into negative territoryfor the first time in history. And now the yield on the benchmark 10-year U.S. Treasury bondhit a record lowon Tuesday.
Its the only way to find income, Allianz Global Investors bond expert Franck Dixmierlamented. And Morgan StanleyInvestment Management fund manager Jim Caronasked, When you look at pension liabilities, insurance, where are you going to get a positive yield? At this point, its the best the market can do.
So, a roughly 1.3% return over 10 years (not even accounting for inflation) is the best the market can do? You dont have to look far for alternatives. Just look at two of the top-performing assets of 2016: gold and silver. Gold has gained as much as 27%, while silver has returned an astounding 44% at its zenith.
The pension funds and insurance companies Caron cites are woefully underinvested in the precious-metals sphere. Moreover, many are facing huge unfunded liabilities. A Citigroup study published this year found that20 countries that belong to the Organization for Economic Cooperation and Developmentare facing liabilities totaling $78 trillion!
Negative yieldswill have a massive and negative effect on most pension schemes funding plans,predictedWarren Firth, actuarial director at Broadstone in the United Kingdom.
If yields continue to fallworldwide, many of these funds will plunge further into a sea of red ink. And if the U.S. economy takes a turn for the worse, or contagion from the Brexit situation spills over beyond Europe, then the Federal Reserve could well beforced to consider negative interest rates.
Yields in even Treasury bonds are so low that we already are seeing negative real interest rates in the U.S. Negative rates are rocket fuel for gold prices, as the World Gold Councilhas demonstrated, while they make business more difficult in many ways for banks as well as pension funds.
A move by the Fed into negative rates could take even more shine off already-anemic Treasury yields. At that point, golds attractiveness as a viable alternative to dismal yields could gain even further ground.
Institutional gold buying by central banks has been a key pillar of support for gold over the past few years. Increasing engagement from pension funds desperately searching for yield could mark the next leg up for a renewed bull market in gold.
Weve already seen high-profile moves into physical gold in recent years from Texasteacher-retirementanduniversity- endowmentsystems, whileJapanese pension fundshave increasingly sought safety in bullion.
Look for interest in gold to grow as investors balk at paying fees to hold government bonds or to keep their money in negative-yielding bank accounts. And should another debt-ceiling debacle dent the faith of global investors in U.S. Treasuries, look for that growing interest in gold to become, potentially, a stampede.