Negative interest rates (which mean you are paying a bank or government to hold your money instead of them paying you) are coming to North America and with that, gold prices could soar.
So far, 2016 has already been a banner year for gold prices. In fact, gold has been the best-performing investment this year. But I think the “party is only getting started” for gold prices.
Below is a chart of the 10-year U.S. Treasury. From the chart, you can easily see the yield on 10-year U.S. Treasuries has been moving in an almost perfect downward trend since 2006—that’s 10 years ago.
Chart courtesy of www.StockCharts.com
The yield on the 10-year U.S. bond currently stands at 1.6%—near its historic low. After the Federal Reserve’s dovish comments this week, U.S. Treasury yields could be headed even lower.
But it’s not just the U.S. where rates are so low; bonds yields around the world are plummeting.
If you buy any Japanese government bonds with a maturity of less than 10 years, they currently have negative yields.
Thirty-year Japanese government bonds have a yield of just 0.22%! Yes, Japan, a country with a national debt that is 250% its gross domestic product (GDP) and is in the midst of an economic slowdown.
In Germany, German bunds (that’s what they call their government bonds) with maturities of 10 years or less also have negative yields.
In France, bonds with maturities of six years or less have negative yields.
What does “negative yield” mean? It essentially means that if you hold the bond until maturity, you are guaranteed to lose money.
To give you some perspective, according to JPMorgan’s Government Bond Index, $8.3 trillion worth of global government bonds have negative yields! (Source: “Govt bonds with negative yield hit record high $8.3 trln -JP Morgan,” Reuters, June 13, 2016.)
At the very core, negative interest rates mean money will be worth less tomorrow than what it is worth today.
So what is the value of money if it depreciates? That is the real question. And maybe that’s just why gold prices are taking off this year.
With the cost of living going up and the value of money going down, there are few alternatives for investors who want to park their capital and not see its value erode. However, gold fits the bill and that’s why, for years now, I have been advocating that my readers have at least some of their capital in gold, especially in the shares of quality gold mining companies.
To quote one of the most famous and level-headed bank governors of modern history, the former governor of the Bank of England from 2003 to 2013, Mervyn King, “And I am very struck by the fact that over many, many years, central banks, governments and individuals have always, despite the protestations of economists, held some gold in their portfolio. Obviously, there is no high running return, but when unexpected things happen, particularly when governments rise and fall, then gold is a means of payment that everyone is always prepared to accept.” (Source: “Misguided policies and economic risk,” World Gold Council, last accessed June 14, 2016.)
The bottom line: given the negative interest rates we are facing around the globe, gold prices will rise. A year or two from today, maybe even sooner, we will be looking at gold in the $2,000–$2,500-an-ounce range. That means that today’s senior gold mining stocks are dirt-cheap.