One of the main justifications of suppressing interest rates – and thus reducing future debt interest – is the demographic issue. To put it another way, there are too many ageing people and no way to fund their retirements. If one remembers where the recent QE fetish emanated from and sees their demographic problem, then there certainly is a correlation between ageing and decreasing populations and the tendency to invoke negative rate policies:

Some time in the not-to-distant future, more nappies will be for sold elderly people versus infants in Japan:

Diaper rush: conquering a $9 billion market no one wants to talk about

With so many other developed countries facing similar demographic challenges it is inconceivable that governments and central banks will not hesitate to use all means necessary to ensure these pension and social security liabilities are funded, one way or another.

With that in mind, recent economic data has again been fairly weak. M&A transactions are making new lows, while the three-month ratio of leveraged load credit rating downgrades to upgrades moved to its highest level since the global financial crisis:

In larger macro news the US budget deficit is now at a level of $1 trillion. Governments cannot help themselves either spending, borrowing or lowering taxes. The days of fiscal conservatism are well and truly over:

In Europe, Germany’s unemployment rate rose for the first time since 2013. The narrative now is for the government to step in and spend:

Germany’s Factory Recession Sends Industry Employment Plunging

Of course, not all government spending is allocated or spent efficiently with a high or sustainable return on investment. The One Belt One Road project from China, heralded with such great fanfare is now slowing:

Interventionism is here to stay. The new consensus is that rates have to be low, stay low, and go negative if necessary. The article below details nicely the current zeitgeist in policy circles.

Monetary policy is better than fiscal stimulus

It used to be the common knowledge that such interventionism in the economy debased the currency and caused inflation hence why Gold was, and remains, such a popular asset class. But these days the story is of course the narrative is that there is no inflation, so there is no need to stop low or negative rates. The chart below suggests otherwise:

The German house price boom is also another worry:

Increasingly however, some prominent figures are suggesting that negative rates are not such a good idea. The case of WeWork, its failed IPO and subsequent revaluation shows what happen when capital is not expensive enough. How many other companies are benefiting solely because rates are so low?

How Do You Like We Now

Long-term negative rates have ‘adverse consequences’ we don’t fully understand, says Jamie Dimon

Of course if rates do ever rise again, the amount of debt that will re-price higher will cause many companies to go under. What was notable this week was the black sheep policy potential reversal of the Swedish central bank:

Sweden’s Riksbank made clear it wants to put an end to half a decade of negative interest rates, as it breaks away from the monetary orthodoxy of the day despite continued signs of weakness in the largest Nordic economy.

This may just be a temporary blip. But it is interesting to note that perhaps the story is shifting just slightly.

What does this mean for Gold?

The general consensus is that the global economy is now totally dependent on low rates and central bank intervention. If interest rates go up, there will be a cascade of defaults and the real possibility of another financial crisis. As a McKinsey report states:

Banks Must Act Now or Risk Becoming a ‘Footnote’

This is the reason why policy makers insist interest rates must remain low. So, if like the market assumes, interest rates will remain low or lower for decades then the money supply will continue to increase, debasing all currencies and decreasing purchasing power to buy essential items like food and housing. Add to that the temptation to turn to interventionist policies such as MMT or universal basic income and its not difficult to see capital becoming allocated in an even more inefficient way. WeWork is just the start.

Thus from the current situation it is easy to see why Gold will remain a significant and increasing part of investment portfolios. Rates rising could trigger a global recession and a collapse of other asset prices. On the other hand, rates staying lower certainly increase inflationary tendencies which mean investors flock to the safe store of value of gold. Either way, gold is only going one way: up.

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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.