Last week we heard that the Bank of Japan became the fourth major central bank to embark on the path of the unknown world of negative interest rate policies. The goal of a negative interest rate policy is to boost lending by commercial banks, which in turn is expected to spur economic growth.
In June of 2014, the European Central Bank (ECB) started its negative interest rate policy, lowering its overnight deposits rate to -0.1%. In September of the same year, it lowered this rate to -0.2%. And in December of 2015, it lowered it further to -0.3%. (Source: European Central Bank, last accessed February 4, 2016.) Back in 2008, the ECB’s overnight rate was two percent.
Sweden’s central bank, the Sveriges Riksbank, launched its negative interest rate policy in July of 2014, when the bank dropped its overnight deposit rate to -0.5%. (Source: Riksbank, last accessed February 4, 2016.)
Denmark’s central bank, the Nationalbank, has a negative interest rate policy of -0.65%. This central bank has had negative interest rates since 2013. (Source: Danmarks Nationalbank, last accessed February 4, 2016.)
And the Swiss National Bank is implementing a negative interest rate policy, too. The benchmark interest rate set by this central bank sits at -0.75%. (Source: Swiss National Bank, last accessed February 4, 2016.)
The list of central banks contemplating negative interest rates is growing. I wouldn’t be surprised to see the Bank of Canada come out with a negative interest rate policy in 2016 or 2017.
Gold Price vs. Negative Interest Rate Policy
In my mind, negative interest rates mean paper money is not worth anything. After all, if you have it, you are basically being punished for keeping it.
When something like this happens (a negative interest rate policy), you are being penalized for holding cash because your bank will give you back less than you deposited.
Because of this, one would assume gold prices would shoot through the proverbial roof as interest rates go negative. Unfortunately, this isn’t happening. Look at the chart below. It clearly shows gold prices have been trending downward.
Chart courtesy of www.StockCharts.com
Just a few years back, gold prices were skyrocketing (reaching about US$1,900 an ounce in 2011) because the global economy was moving toward lower interest rates. Now, we have it worse—we have interest rates going negative—and gold prices are not aggressively sharping back. Sure, gold prices are up nine percent this year, but that’s paltry compared to how oversold gold bullion had become and the new reality of negative interest rates.
What’s Really Ahead for Gold Prices?
Dear reader, my major predictions for 2015 were that stock prices would spend the year building a major top and gold prices would spend the year putting in a major bottom. I think that’s exactly what happened last year. Now it’s time for gold prices to start their move back upward.
Negative interest rate policies are great for gold. As China further lowers it domestic interest rates to deal with its slowing economy, as the Federal Reserve pulls back on its promise to raise interest rates in 2016, and as more world central banks adopt a negative interest rate policy, gold prices could be in for a banner year in 2016.