Gold and silver prices are being driven higher by global economic weakness and the growing number of central banks implementing negative interest rates. While gold and silver prices normally have a negative relationship to a strong U.S. dollar and low interest rates, that’s not the case this time around. And until the global economy registers sustainable growth, gold and silver will continue to be one of the most attractive investments out there.
Gold & Silver Rise on Growing Fears of a Global Recession
After years of unsustainable double-digit growth, the stock market is giving up some well-deserved ground. Not because of profit-taking, but because fundamentals are catching up with share prices.
So far in 2016, the S&P 500 is down close to five percent and has lost roughly nine percent of its value over its 52-week high. Gold, on the other hand, is up more than 16.0% since the beginning of the year and is trading at an eight-month high, while silver has gained almost 10.0% and is at a three-month high.
Silver and gold might be zero-yielding assets, but they’re both looking a lot more attractive when you consider stocks are tanking, fourth-quarter results were pretty weak, and the global economy is in the tank.
It doesn’t hurt that the Federal Reserve has taken a cautious tone regarding future interest rate hikes. Since the Federal Reserve raised rates in December, for the first time in nearly a decade, oil prices fell even further, and the stock market has plunged.
On top of that, weak fourth-quarter results from S&P 500-listed companies and global economic downgrades from the World Bank, International Monetary Fund (IMF), and the Organisation for Economic Co-operation and Development (OECD) have made the Federal Reserve taken a second look at its interest rate hike policy.
Which is a good thing.
Almost 25% of Global GDP Is in Negative Interest Rate Territory
In addition to the average American, the global economy may not be able to handle higher U.S. interest rates either. That’s because roughly 25% of global gross domestic product (GDP) is operating under negative interest rates. (Source: “Over a Fifth of Global GDP is Now Covered by a Central Bank With Negative Rates,” The Wall Street Journal, January 29, 2016.)
The Bank of Japan recently introduced negative interest rates of -0.1%. Back in 2012, the Danish central bank initiated negative interest rates; in 2014, the European Central Bank (ECB) and Swiss National bank both introduced negative interest rates. Sweden followed suit in 2015.
The Bank of Japan and the ECB are responsible for around 21% of global GDP, while Danish, Swedish, and Swiss GDP add up to less than 2.5% of the global total. Going forward, Canada is the country most likely to introduce negative interest rates. It accounts for a little more than one percent of global GDP.
What do negative interest rates mean for investors? People and institutions are paying the banks to hold onto their money. Since it costs money to park your cash in the bank and stocks are in a tailspin, it might make more sense to invest in something—like gold and silver—that can provide you with a return on your investment.
Wall Street may be telling investors to not waste their time with precious metals, but if they found a stock performing as well as gold and silver, they’d be screaming, “buy!” In a chaotic, volatile market, investors need to be tactical. Right now, silver and gold looks a lot more compelling than most other investment opportunities.