Where Can Investors Hide From Punishing Negative Rates?

A few assets remain safer options as more central banks adopt the unorthodox policy

Are Central Banks Irrelevant or in the Driver's Seat?

With volatile global financial markets, and more central banks turning to negative interest rates, it can be hard to think of a reliable place for your money these days.

Economic weakness around the globe has weighed on U.S. growth, but Federal Reserve officials have repeatedly said that pushing interest rates below zero here is still premature. Chair Janet Yellen said the central bank is re-examining negative rates as a policy tool if the economy stalls.

In Japan, the euro zone, Switzerland, and other countries that have adopted sub-zero interest rates, banks are charged for parking their cash reserves at central banks. The idea is to force them to lend more of it out to consumers, with the hope to spur spending and stimulate growth. The worry is banks would pass the associated costs onto borrowers. 

So how can investors protect their money in this environment? Here are some thoughts from a few investment strategists.

Gold

Bullion’s zero yield shines relative to other money-losing assets. Gold is up 15 percent this year at $1,219 an ounce amid concerns that central bankers are losing their grip on the global economy.

"Gold obviously doesn’t pay a dividend but at the same time, it doesn’t devalue either with regard to itself," said Axel Merk, president and chief investment officer of Merk Investments LLC, whose fund owns physical gold. While the price of the precious metal can rise and fall in international markets, said Merk, a central bank can't debase it and its purchasing power isn't reduced through inflation.

Cash

Despite the naysayers, cash is still king. A Bank of America Merrill Lynch fund-manager survey from earlier this month showed that global investors are sitting on the highest levels of cash since November 2001.

Money-market funds have been a parking spot for most of that cash, but things could get tricky if rates move into negative territory in the U.S.

There’s risk that some of these funds could refuse to accept additional investment, or "ultimately, as we see in Japan, they have to close,"  said Karen Shaw Petrou, managing partner of Washington-based research firm Federal Financial Analytics Inc. About 11 money-market funds in Japan stopped taking in new investments as the industry grapples with sub-zero rates.

The Japanese would also know more about storing cash under the mattress. After the country's 2011 earthquake, tsunami and nuclear disaster, the national police agency recovered thousands of safes containing approximately $30 million in cold, hard cash.

Real Estate

When cash outgrows mattresses, real estate is another alternative, according to Jeff Sica, who helps oversee $1.5 billion as founder and president of Circle Squared Alternative Investments in Morristown, New Jersey.

U.S. commercial-property prices have surged since the recession, with values in cities such as San Francisco and New York exceeding the 2007 peak, according to an index by Moody’s Investors Service and Real Capital Analytics Inc.

While returns for property owners are at historic lows, they're still much higher than what investors would get from money markets or bonds.

"We live in a world where there's no place to hide, and you have to choose your evil," Merk said.