Negative Interest Rates to Send Gold Prices Soaring
In the simplest words: gold prices could skyrocket on the back of negative interest rates.
Before going into any details, it is important to know what negative interest rates actually are, and what gold really does.
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What is a negative interest rate? When people say “negative interest rate,” they essentially mean that instead of getting a rate of return, investors lose money. For instance, if someone borrows $100.00 from you and you only get back $98.00 at the end of one year, you have “invested” the $100.00 at a negative interest rate of two percent.
At their very core, negative interest rates mean that the value of money is next to nothing. In normal economic conditions, one would expect to earn a positive rate of return. In a negative interest rate environment, borrowers get paid and savers get scrutinized.
With this said, when the value of money becomes zero, gold becomes really helpful. It holds value.
Now, as it stands, there are five central banks that are implementing negative interest rate policies. As a result of this, we are seeing a significant amount of government debt selling at negative interest rates.
Consider this: as of September 12, $10.9-trillion-worth of government debt globally was carrying a negative yield. (Source: “Universe of negative-yielding sovereign debt falls to $10.9tn: Fitch,” Financial Times, September 21, 2016.)
Here are three interesting facts you should know about the $10.9 trillion of sovereign debt with a negative interest rate:
- The governments of Germany, France, and Italy have over $2.0 trillion of debt that currently has negative yield.
- Japan’s government has $6.5-trillion-worth of debt with negative yield.
- 95% of the Switzerland government’s outstanding debt has yield below zero percent.
You really have to question this.
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Currently, we have $10.9 trillion of debt that’s held by investors and institutions. When this debt matures, those who hold this debt are going to receive less money than they put in.
Now, let’s bring gold into this.
Don’t for a second think that the negative interest rate trend will turn around anytime soon. As investors come to reality (they are way too complacent right now), they will look for value.
Where will they go? Stock markets aren’t presenting any great opportunities. The valuations are well above the historical average, and a stock market crash could be in the making sooner rather than later. As for bond markets, due to monetary policies around the world; they don’t offer much return for investors.
Credits: Pixabay.com/krzys16
It wouldn’t be shocking to see investors rushing toward precious metal. In the process, gold prices could skyrocket. Why gold? It is hands-down one of the best hedges against uncertainty and currency devaluation. With negative interest rates prevailing, we have an abundance of uncertainty.
Where’s the Real Opportunity as Gold Prices Rise?
Gold mining companies are going to be the biggest beneficiaries as gold prices move higher. They tend to provide leveraged returns to gold prices. Since the beginning of 2016, we have seen gold prices rise about 24%, a few gold mining stocks have increased 200% or more.
Now, if we assume that gold prices reach above $2,500—or about 100% from where they currently stand—it wouldn’t be shocking to see several mining companies rising over 1,000% in value.
