Gold Stands Tall as Central Bankers Gamble with Negative Rates

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It’s a Topsy Turvy World

Savers traditionally earn interest on deposits at banks. Some of you may remember, back in 1985, a six-month CD rate earned nearly 11%, according to That is unthinkable today. Today a six-month CD earns a 0.16% rate.

But, hey at least it’s not negative, like many countries in Europe and also Japan today. Some on Wall Street are warning that global central bankers gambling on an economic outcome they may not be able to win.

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Globe Goes Negative

Nearly 500 million people currently live in countries that now have a negative interest rate environment, according to an S&P Global research report.

If the next U.S. recession hits before the Federal Reserve is able to normalize its still near-zero interest rate policy, negative interest rates could be coming to America too.

If the idea that a bank interest rate could go negative has you scratching your head, you aren’t alone. It is a little mind boggling.

The European Central Bank, the Danish Central Bank, the Swedish Central Bank and the Swiss National Bank have all set negative interest rates. The Bank of Japan also has set a negative interest rate. The basic aim is to encourage banks to lend money as opposed to sitting on cash reserves — in an effort to stimulate economic growth.

Many of the best minds in the investment community are alarmed at the potentially dangerous course that global policy makers have taken in recent years amid unsuccessful attempts to juice up economic growth.

Doubling Down At The Blackjack Table?

Bill Gross, the legendary portfolio manager at Janus Capital, took a hard look at the negative interest rate experiment in his October 2016 Janus Capital Group Investment Outlook, which he calls: Doubling Down.

Poker and blackjack players may be familiar with the concept of the so-called Martingale System. This suggests that is mathematically impossible to lose, as long as you have enough money, you keep on betting, and the casino is willing to take the bet.

Gross likens central banker’s experiment with negative interest rates as a Martingale approach that has turned our financial markets into a casino.

“Our financial markets have become a Vegas/Macau/Monte Carlo casino, wagering that an unlimited supply of credit generated by central banks can successfully reflate global economies and reinvigorate nominal GDP growth.” Bill Gross

Negative interest rates are an untested experiment. A policy of negative interest rates that remains in place too long could damage bank profitability, weakening one of the key credit transmission mechanisms that could help boost financial activity, according to S&P Global research.

Gold’s Historic Role as Currency, Store of Wealth Is Being Revived

In this environment, Gross concedes that investors are weary of receiving near zero returns on their money and are looking for higher returning and less risky alternatives. In this context, Gross points to gold.

How much of your portfolio do you have allocated to hard assets like physical gold? The traditional 60/40 stock-bond allocation doesn’t work in today’s topsy turvy environment. Stocks are near all-time highs, fueled by the relentless easy money policy by the Federal Reserve. But, where is the value?

Gross concludes his report with a warning: “Investors/savers are now scrappin like mongrel dogs for tidbits of return at the zero bound. This cannot end well.”

Blanchard Can Help Guide You Through This Process

Where is the real value today? In hard assets, like gold. Now is the time to diversify into gold and hedge your paper assets. Give us a call at 1-866-764-9135 and our portfolio managers will help design an individual investment plan just for you.