This Is Big News for Gold Prices
Negative interest rates have become a popular way for central banks to kick-start the economy—a decision that could have big implications for the gold price.
Outside the hallowed halls of global central banks, few people think they’re a good idea. That’s because there’s little evidence to suggest negative interest rates actually help spur economic growth. The best way to combat abysmal economic growth and the widespread adoption of negative interest rates is with precious metals like gold. They may not pay a dividend, but precious metals a much better alternative to sitting on cash or parking it in the bank.
Negative Interest Rates Not Working
Negative interest rates have been adopted by Denmark, the European Central Bank, Sweden, and Switzerland. Why? Central banks around the world are adopting negative interest rates in an effort to stimulate economic growth, raise inflation, and make the local currency more attractive.
But it’s not really working. The world economy is weak: China, the world’s second-biggest economy, posted terrible trade data, and the global economy for 2016 and 2017 has been downgraded by the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD). Plus, 2018 isn’t exactly promising either.
In fact, even central bankers aren’t sure negative interest rates work. The Bank of International Settlements (BIS)—a coalition of 60 central banks that make up around 95% of global gross domestic product (GDP)—is sounding the horn saying businesses and people don’t necessarily borrow more money in a negative interest rate environment.
If that’s the case, negative interest rates are a moot point. Conversely, if businesses and people do take on more debt and it doesn’t help promote economic growth, all we’re left with is even more debt, no economic prospects, foreclosures, and bankruptcy.
An adage attributed to English economist John Maynard Keyes suggests monetary policy can be very effective when it comes to cooling down an economy (higher interest rates) but not so much when it comes to creating growth (low or negative interest rates). You can pull the economy back if it’s tied to a string but you can’t push it forward.
Central banks have been pushing on the string for years now, and look where it’s gotten us.
Gold Is a Negative Interest Rate Killer
Low and negative interest rates are great for those who can afford to borrow but bad for lenders (big banks) and those trying to save money. Low interest rates are also terrible for those who were hoping their fixed income investments would help carry them through retirement.
And low and negative interest rates aren’t a short-term anomaly. They’re an integral part of the central banks’ bag of tricks. Low interest rates—and for some, negative interest rates—are going to be around for years and years.
If you don’t like the idea of your bank paying ultra-low interest rates or even paying for a bank account with negative interest rates, there are investing alternatives. The biggest winners, when it comes to negative interest rates, are precious metals like gold and silver.
In fact, investors are piling into gold and silver, looking for economic shelter as more and more central banks turn their attention to negative interest rates—a move that can seriously destabilize the local currency.
While gold is never as attractive as a high-yield-bearing investment when the economy is doing well and interest rates are on the rise, gold looks more attractive when borrowing costs are negative. Negative interest rates are essentially proof that central banks can’t do anything to prevent another financial crisis.
But you can prevent central banks from chipping away even further at your retirement savings. Gold is becoming an excellent store of value as more and more cracks form in the global economy.
All of which is good news for gold prices. If you don’t like the idea of purchasing physical gold, you could also look at the SPDR Gold Trust (NYSEArca:GLD). The world’s largest bullion-backed fund is up 17.45% year to date.
Then there are gold miners, like Barrick Gold Corporation (NYSE:ABX). The world’s largest mining company, and largest gold miner by output, has seen its share price climb almost 75% since the beginning of the year.
Over the same timeframe, Newmont Mining Corp (NYSE:NEM) has gained more than 40% while Pan American Silver Corp. (NASDAQ:PAAS) is up 50% and Coeur Mining Inc (NYSE:CDE) has soared 78%.
In the wonderfully weird world of negative interest rates, gold prices could skyrocket.