Over the years, the word inflation was synonymous with higher gold prices, but in my opinion negative interest rates will have a much more profound effect on the price of gold. As an investor, why would anyone want to pay the bank to hold their money.
The effect of negative interest rates:
Across the pond, Denmark, Sweden, and Switzerland (and let’s not forget Japan) have adopted a negative interest rate policy. This policy effectively means that commercial banks must pay to hold excess cash on deposit with the central banks. Now one must ask, how low can the negative rates go and how does the average investor navigate this landscape?
Over the years, the word inflation was synonymous with higher gold prices, but in my opinion negative interest rates will have a much more profound effect on the price of gold. As an investor, why would anyone want to pay the bank to hold their money. And with more and more European people who are reaching retirement age and having to deal with reduced retirement benefits, there is a concerted effort of many to find a higher rate of return that banks can no longer offer.
Tomorrow we will hear from ECB President Mario Draghi. He has a tough job and I expect he will have limited tools to work with. Additional stimulus will be needed in the EU, but even this tool seems to be losing its effectiveness. There are so many problems to address in the EU. A recession continues to plague many countries. Migrants are entering by the thousands and governments have no means to support them. Unions are still trying to strong arm governments that have no ability to pay for those promised benefits. Not a pretty picture.
That’s why we see an increase virtually every day in ETF holdings and an increase in physical demand in the countries I mentioned above. Yes there have been counter forces driven by comments from the FED governors saying a rate hike is still in the cards, but I believe as I commented before that it’s just a ploy by our Federal Reserve to give central banks time to purchase more gold at attractive rates. I expect a “no” vote on rate hikes by our Federal Reserve next week, which in turn will help fuel gold to higher levels. In the meantime, we see lower gold prices this morning, as oil and the dollar trade higher. The question remains, do the longs have the patience to wait for Draghi’s comments, or sell gold and take some profits at these levels?
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.