Gold strengthens on Fed inaction as experts debate negative rates in U.S.
The Federal Reserve did what was expected Wednesday and left its key interest rate unchanged, weighed down by growing uncertainties over the United Kingdoms June 23 Brexit referendum.
Spot gold, having already priced in the Feds inaction, bounced modestly toward $1,300 by afternoon trading, while the gold futures price touched that key psychological level as Fed Chairwoman Janet Yellen conducted her post-meeting press conference. Silver was trading near $17.50 in the afternoon.
Emphasizing a gradual and data-dependent pace for future rate hikes, Yellen told the media that "we need to assure ourselves that the underlying momentum in the economy has not diminished.
Central banks losing control: The key takeaway from the Feds statement is that it now only expects to implement a single rate hike this year. Thats a major falloff from earlier projections that saw the central bank hiking as many as four times. Not to mention the fact that back in April, most Fed policymakers were anticipating a move in June.
With rates practically everywhere around the world near zero or even in negative territory even as global growth falters, faith in the Fed and its peers is diminishing. Central banks are losing control and they don't know what to do ... just like the Republican establishment and Donald Trump, said DoubleLine Capital bond guru Jeff Gundlach in a presentation Tuesday. Gundlach sees gold prices heading to $1,400 in the near future.
German bund yield goes negative: Another canary in the coalmine for the global economy occurred Tuesday when the 10-year German bund fell below zero for the first time ever a sign that investors are desperate for safe havens.
Basically, safe havens are back in fashion," PVM Oil Associates analyst Tamas Varga told Reuters. "The thought process is that if the UK leaves the EU, then the EU might slip back into recession."
With the Feds purported plan to raise interest rates on hold for yet another month, investors are starting to ask: Can negative rates come to the U.S.?
It likely would take a major crisis for the Fed officially to impose negative rates, but weve seen negative real rates on numerous occasions and theyve been rocket fuel for gold prices.
Real rates can definitely go negative: The World Gold Council confirmed golds outperformance during low and negative rates in a March 2016 study, as has U.S. Global Investors CEO Frank Holmes, who noted that when bullion peaked at $1,900 in 2011, real interest rates were nearly -4%. Gold has historically performed best when real rates turned negative, Holmes wrote in April. To get the real rate, you subtract the current consumer price index (CPI) reading, or inflation, from the government bond yield. When yields are low or negative, as they are now it encourages smart investors to seek other stores of value, including gold.
Some investing pros appearing on CNBC on Tuesday argued that U.S. bonds could be headed for negative territory. Our bonds, by the way, have been negative a long time in a real sense, but not nominal, Max Wolff of Manhattan Venture Partners told the network. I dont see them going nominal negative, although I think theyre going to stay real negative for a while in terms of inflation-adjusted.
Upside is greater in gold: But Dennis Davitt of Harvest Volatility Management sees room for even greater negativity. I think you could see negative rates in the U.S. If Germany and other countries in the world go even further negative, it turns into a number-line game. So where zero lies on the number line, who knows?
With the negative-rate trend gaining steam, golds luster can only increase. Considering the fact that a lot of sovereign debt is negative-yielding now, and investor may say, Why dont I consider gold, for instance? It doesnt yield me anything, but neither does this sovereign debt, and perhaps the upside is greater there, Citibank Singapores Zal Devitre told CNBC.