Usually low inflation is bad news for gold prices. But according to one analyst, the economy’s recent bout of deflation could actually be bullish for precious metals.
Gold prices are soaring. Year-to-date, the yellow metal is up more than seven percent. The move is unexpected, given most analysts expect gold prices to fall during periods of low inflation.
According to Boris Schlossberg, the reason is simple. In an interview with CNBC, the BK Asset Management currency strategist explained that investors can pile up their hard-earned banknotes under the mattress and get zero percent, which would be better than paying banks to keep their money.
“Negative interest rates have provided a fundamental reason to own gold,” CNBC quoted currency strategist Boris Schlossberg of BK Asset Management saying. (Source: “The surprising new case for gold,” CNBC, February 3, 2016.)
On Friday, the Bank of Japan trimmed interest rates to -0.1% to combat long-stagnant inflation and economic growth.
Japan became the latest country to adopt a negative interest rate policy, following in the footsteps of Denmark, Switzerland, and Sweden, which sparked flight-to-safety bids, including gold.
Another strategist, Phillip Streible of RJO Futures, projects gold prices will soon rise to $1,200 per troy ounce, which is about $50.00 above their current levels. (Source: Ibid.)
Negative interbank rates would obviously be good for precious metal prices because the bullion houses will find it more costly to hold dollars than gold and silver, reversing the standard position in paper markets.