Gold's $9.2 Trillion Tailwind

Investors aren't buying bonds for their yield anymore.

One of the biggest challenges for gold as an investment is that, like cash, it doesn't really generate income.

When there are bonds and stocks out there that offer interest and dividend yields to offset the risk of any fall in capital values, why choose a shiny metal that's a pure punt on price movements?

Well, about those yields:

Minus Sign

There are now more than $9 trillion of sovereign bonds outstanding that have negative yields

Source: Bloomberg

With negative interest rates increasingly becoming the norm in developed countries, one of the key factors counting against gold as an investment is weakening.

About $9.2 trillion of sovereign bonds are trading with negative yields, according to data compiled by Bloomberg, and some blue-chip companies are even getting in on the act.

Why would anyone agree to pay for the privilege of lending money?

This idea isn't quite as bizarre as it seems. Measured in terms of total return -- the price of the underlying bond, plus the yield from its coupon payments -- sovereign debt has been on a steady upward march for five years, barely disturbed by the adoption of negative interest rates in the euro zone and Japan.

Word Is Bond

Blink and you'll miss the hit to total returns that sovereign debt suffered from negative interest rates

Source: Bloomberg

It's worth stopping for a moment to reflect how weird this state of affairs has become. Bonds aren't so much fixed-income assets now as fixed-outgoings ones, with investors buying them for their capital appreciation rather than their coupon payments.

Meanwhile, optimism about corporate earnings growth has plateaued. The valuations of major equity indexes have been trading sideways for a year, but dividend yields have been tracking up.


The blended forward 12-month price-earnings ratios of major equity indexes have been trending sideways for a year

Source: Bloomberg

In other words, stocks are now all about income, and bonds about capital growth. It's the precise opposite of the usual situation.


Blended forward 12-month forecast dividend yields on major indexes suggest that boards are paying out more even if valuations aren't rising

Source: Bloomberg

There is some good news in this for gold, an asset that Gadfly tends to shun. Whether through mythology or prudence, it retains an attraction for investors as a haven when trouble blows up 1  -- and we're certainly living in interesting times.

The problem with that thesis has traditionally been that investors seeking shelter from financial storms could also choose risk-free government debt, with its additional sweetener of interest payments. But with all those notes trading with looking-glass yields, the choice now is a much more stark one between the capital performance of two different assets. 

Don't make the mistake of thinking gold is heading to $2,000 an ounce any time soon. Investment funds who've flipped from a record net-short position in Comex gold futures to a record net-long in just seven months could change their minds again, weighing on prices as they did for three years through 2015.


Investment funds' net positions in Comex gold futures went from a record short position last December to a record long position this month

Source: Bloomberg

Note: Data isn't available before 2006.

That's a risk you don't face with Treasuries. If you're prepared to hold to maturity, it's hard to lose more than a nominal percentage point or so on the face value of blue-chip government debt. Gold, even after its best start to the year since 1979, is down 29 percent from its 2011 peak.

Still, the yield on government debt -- for so many years a headwind for metals' investors -- is increasingly turning into a tailwind. Gold may be the most malleable of metals. But it's looking a little more robust.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. We've previously poured cold water on the basis for this belief, but the metal's surge of as much as 8.1 percent on the day of the Brexit vote last month is an indicator that its luster of safety is undimmed in the current market. There's little to be gained from arguing whether such beliefs are right or wrong: The market can stay irrational longer than you can stay solvent.

To contact the author of this story:
David Fickling in Sydney at

To contact the editor responsible for this story:
Katrina Nicholas at

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