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Negative Interest Rates – Good For Gold?

Negative Interest Rates – Good For Gold?
Category: Market Reports
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Posted: 03-23-2016 11:50:00 AM

In order to understand what could happen here in the States, we need to look at where negative interest rates are a fact of life.

Why negative interest rates can be a very bad thing for the European economy, but good for the price of gold.

Ever since Janet Yellen was asked about the possibility of the FED adopting a negative rate policy, the topic has been discussed and analyzed all over the internet and in financial publications.

In order to understand what could happen here in the States, we need to look at where negative interest rates are a fact of life.

On March 10th the European Central Bank (ECB) cut rates, charging banks from 0.3 to 0.4 percent to hold cash overnight, putting Denmark, Sweden and Switzerland in negative territory. So if you are a banker in Europe, what can you do in order to eliminate this cost? I guess you don’t have much of a choice. You need a return on your cash so you make new loans.

This situation has the potential to spark a couple of scenarios that would both impact gold:

  1. Some would think this might drive banks to make more risky loans in order to make the bank more profitable, right? Hm…risky loans sound familiar? Remember when banks issued a significant number of mortgages to unqualified borrowers who bought houses that they couldn’t afford…leading ultimately to 2008’s Financial Crisis? Of course, that dark time was driven by more than just a need to be merely profitable…it was spawned by greed that lead to the “big short” or risky loans on steroids. So, if more risky loans are indeed written…regardless of the reason…shouldn’t that be cause for concern and possibly inspire more investor faith in say…gold?
  2. With European banks charging everyday customers a fee for keeping money on deposit in the bank, in addition to all the problems that the average Joe is facing in Europe these days (the inability for governments to meet pension obligations, the tremendous influx of migrants who must be fed and housed putting a strain on the EU balance sheets, reoccurring tragic violence as we just saw in Brussels) where will the average investor put their money? Does gold again sound like the answer?

So now that they are convinced that Gold is the investment of choice in an negative interest environment, what happens if this hits our shores?

I can see it now, with interest rates below zero major banks will be pressed to show profits and invest in risky high yielding assets. (Again, sounds like 2008, right?) Consumers will pull cash out of banks and hold their cash, because they will be charged by the banks to hold their money and in turn reduce spending. This affects the bottom line of businesses all over the U.S.

Did I paint a clear picture on what can happen here if negative interest rates become a reality? Remember where gold was in 2008 and the rally we witnessed in gold in the four years that followed as the economy tried to recover?

Definitely worth pondering and watching.

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About The Author

Walter Pehowich Author Name: Walter Pehowich
Walter Pehowich is the executive vice president of precious metals investment services for Dillon Gage with over 38 years of experience in precious metals investment services. His career began in 1977 at Bache (which evolved to Prudential-Bache Securities and then Jefferies Investment Bank). While at Jefferies, he served as senior vice president with oversight of investment grade precious metal products. Pehowich holds a National Futures Association (NFA) Series 3 license, authorizing him to advise and sell alternative investments in commodities and futures markets.

What are your thoughts? Negative Interest Rates – Good For Gold?