Gold Bulls Feast as More Central Banks Drive Rates Below Zero

  • Nearly a quarter of world economy experiencing negative rates
  • Deposit losses mean it's better to own solid currency: Faber

Is the Gold Rush Slowing Down?

Gold bears for years fed off the prospects for higher borrowing costs. Now bulls are thriving in a world where negative rates are becoming commonplace.

The Bank of Japan adopted negative rates last month to spur growth, joining central banks in Denmark, the euro area, Sweden and Switzerland. With about a quarter of the world economy facing negative rates in some form and growth faltering, gold has become one of this year’s best investments.

It’s a big turnaround for the metal which slid to a five-year low in December as the Federal Reserve readied for its first rate increase in almost a decade. With China’s slowdown roiling markets, there’s less chance the Fed will move again until next year. Negative rates mean depositing cash would leave investors with less than when they started, making traditional stores of value such as gold more appealing.

“Leave a million dollars with a bank, and in a year, you get only something like $990,000 back,” Marc Faber, the publisher of the Gloom, Boom & Doom Report, said by phone. “I would rather want to own some solid currency, in other words gold.”

Bullion rallied 15 percent to $1,219.14 an ounce this year, beating other commodities, sovereign bonds, major currencies and most stock indices. Investors are buying through funds at the fastest pace since 2009. Prices are still down a third from their record in 2011, when monetary stimulus boosted demand for an alternative to currencies.

QuickTake The Rise and Fall of Gold

Gold provides returns only through price gains. Aside from some central bank deposit rates, about $6.8 trillion of sovereign debt also offers sub-zero yields.

While traders at the start of January were almost certain that U.S. rates would increase again this year, they now see just a 41 percent chance of that happening, and policy makers are worried about potential drags on the U.S. economy. The Fed may even consider pushing rates below zero if the economy weakens enough, Bank of America Corp. and JPMorgan Chase & Co. have said.

“We’re back to the point where we’re looking at negative rates around the world, including in the U.S., and this is very worrisome,” said George Zivic, a portfolio manager of the Oppenheimer Commodity Strategy Total Return Fund in New York. “Negative rates also mean there’s no growth around, which makes gold more appealing.”

It’s more tempting to own a non-yielding asset such as gold when returns on other investments are hard to find, according to Faber. He said in December that the U.S. is at the start of a recession and its stocks would fall this year.

“When you have negative rates from banks and bonds, then gold with a zero-percent yield becomes a high-yield asset,” Jim Rickards, author of “Currency Wars: The Making of the Next Global Crisis,” and chief global strategist at money manager West Shore Funds, said by phone. “With nominal rates coming down, real rates are coming down and gold is going up. That’s a very predictable response.”

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