Warren Buffett talks mattress money and bank runs under negative interest rates

One of the biggest reasons to invest in gold in 2016 has been the rise of negative interest rates imposed by some of the worlds major central banks.

This year the Bank of Japan shocked the world by following the lead of several European banks and unveiling negative rates to try to boost its economy.

Negative rates go one step further than zero percent interest rates by forcing depositors to pay fees for the privilege of parking their cash at a bank. The goal of negative rates is to generate inflation by pressuring depositors to spend their money instead of futilely trying to save it.

The growing preponderance of negative rates has now even generated commentary from famed billionaire investor Warren Buffett in a series of interviews he gave leading up to his annual Berkshire Hathaway shareholders meeting in Omaha, Neb., last weekend.

Long gone are the days of double-digit interest rates, and that has changed investors behavior and the overall attitude toward risk. When interest rates were 15% [in the early 1980s], you know, it was an enormous gravitational pull on all assets, not just stocks, he said. If you can get 15%, it makes the choices way different than if you get zero.

The problem of low rates: Times have changed, however. Zero rates, which central banks set to try to reinvigorate their economies, have long been a problem for savers and retirees, who cant get a return on their interest-bearing accounts. Buffett weighed in on that dilemma last Friday.

Its not just a problem for insurance companies, its a problem for retirees, its a problem for anyone thats stuck with fixed investments and finds that their income is a pittance … and that was something that wasnt in their calculation 50 years ago Buffett said.

Uncharted economic territory: You can read Adam Smith, you can read [John Maynard] Keynes, you can read anybody and you cant find a word to my knowledge on prolonged zero interest rates that is a phenomenon nobody dreamed would ever happen, Buffett added.

Even Berkshire is feeling some discomfort because of zero interest rates. We have close to $60 billion thats out invested at about a quarter of percent or less, Buffett said. One point on $60 billion is $600 million a year. If we were getting 3% or 4% on that money, thats a couple billion to us. You notice it.

Now, though, with negative rates becoming a more common central-bank strategy, fixed-income investors are even worse off. I dont think anybody knows exactly what the full implications of negative rates will be, he said. And for Buffett, negative rates logically require a hitherto-unthinkable course of action.

Better off with money under a mattress: Very, very few people would have dreamt in 2009 that we would have this duration of low rates and have people still expecting low rates after the seven years or so were up, he told CNBC. No, its a different world. And its certainly a different world when you have a lot of money in euros, as we do, and youre better off putting it under your mattress than in a bank.

Did you catch that? The worlds most famous investor, who prides himself on focusing on productive assets, just admitted that money under the mattress is the only way to go in a negative-rate environment.

There could be a point where youd really want to start withdrawing currency. That would be an interesting point, if currency in a bank is worth less than currency in your hands or in a mattress, that could produce something in the way of behavior that nobodys even anticipated.

No choice but to withdraw cash: In other words, bank runs? Well, if the deposits arent doing anything there and, and they charge you for having them there, you know, I might contemplate taking them out.

But in negative-rate setting, there is one place better than a mattress for your money: gold. The biggest knock on gold is that it is a non-interest-bearing asset. With banks and bonds providing at least some return on cash, why risk putting money into gold when the price can fall? That was the argument of golds critics.

But now that banks and bonds are providing negative yields, gold actually looks great in comparison given its upside potential. The World Gold Council recently released a paper arguing that demand for gold may structurally increase as negative-rate policies spread. Gold returns in periods of low rates are historically twice as high as their long-run average, the WGC said. Investors may benefit from increasing their gold holdings up to 2.5 times, depending on the asset mix, even under conservative assumptions for gold.

Warren Buffett has never been a fan of gold, although he once had a massive position in silver. However, if push comes to shove and negative rates come to the United States, Buffett might do well to consider removing his cash from underneath his mattress and trading it for both gold and silver.