Goldex Heartbeats: Negative rates are near

Goldex Team

Editorial content

Despite thousands of years of interest rates at positive levels, the effort to normalise the abnormal continues unchecked. Negative rates, which charge the saver or lender for having cash, while benefiting the borrower by being paid to borrow, look likely to endure. As if on cue, they are now being heralded as the fix-all, magic elixir by the many central banks and academics:

Fed Paper Says Negative Rate Policy Can Provide Real Stimulus

The reality is of course is that governments have over-borrowed and over-promised, and now need to keep their refinancing costs as low as possible. And while politically it is difficult to raise taxes, having an “independent” central bank enact these policies means these measures are not so noticeable. Inflation, the public is told, remains low, and these low rates are for an emergency period only. Only this is an an emergency with no end in sight. Savers are punished, currencies devalued, and capital is allocated inefficiently as investors chase anything with a yield, ignoring potential risks. For example, Apple’s market capitalisation has increased by $415 billion since cutting revenue guidance by $9 billion in January.

And these are not the only stories of investors being promised the world, only to find their capital is at significantly more risk than they thought

Low rates mean that risk is not properly assessed or compensated for. If borrowers are paid to borrow, the operational discipline required for running a government or enterprise efficiently completely disappears. For a short while, these policies appear to be working. But when the mathematical reality of the natural swings of economic activity catch up, what once was safe is no longer.

And the global economic data does not seem to be improving. In China, exports fell again in September by 3.2%, far lower than expected. Global PMI expectations continue to plummet:

The ever-important US consumer confidence is now also showing signs of weakness.

Morgan Stanley are now arguing that a large proportion of US consumers “are under stress — rental households with lower income and lower credit scores… If the direction of gains in employment reverses, look for the cracks… to widen.”

Back in Europe, German exports dropped nearly 4% year over year. There are warning signs everywhere. However, the prevailing narrative is that these policies are fine as there is no inflation. It depends where one looks however. The world’s largest wealth manager shows inflation in real estate:

UBS Global Real Estate Bubble Index 2019

For example a 60 square metre apartment costs the equivalent of 14 years in salary in London. Prices have risen so quickly due to the desperation to buy anything that yields above zero. If there is any further decline in the price level, then many investors will have to take a loss.

The general narrative of no inflation is incredibly important to policy makers as it permits policies such as low or negative rates. But the warning signs are there:

And while the story may be amusing, it’s also important to note how the absurd can become normal so quickly:

Chef Tom Kerridge says £32.50 fish and chips ‘easily justifiable’ – Kerridge tells Cheltenham literature festival his dish uses ‘incredibly expensive’ potatoes

The in-depth article below on what is perceived as low inflation is very important.

The Common Knowledge of Inflation

It is perhaps a combination of these things: debt levels, inflation scares and dire economic data that have led to the recent upsurge in gold buying.

Global gold-backed ETFs and similar products increased their collective gold holdings by 75.2t to 2,808t in September, reaching the highest levels of all time.

Source: @EricBalchunas on Twitter

Finally, it is perhaps these types of policies, that continue to appear, despite so many reports to the contrary, that make many savvy investors so nervous. The below headlines would have been considered a huge story not so long ago. Now, after the repo market issues a few weeks ago, and perhaps some pressure from the US President, we have a huge, new round of intervention.

Gold ends higher as the Fed announced the start of a ‘massive’ bond buying program

As this final chart shows (Louis James), once Gold starts to move, it can really move. These are unprecedented times. Even Greece can borrow at negative rates. The manipulation of the system is real and clear. It is no surprise that in such moments Gold can move:

Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.