+49 30 6521 24928 (GER / ENG) support@bar9.com

Gold vs Negative Interest Rates

Kieran Smith
May 1, 2020

The world is teetering on the brink of a new economic policy. Not one that was written about by capitalism’s founding father Adam Smith, or even John Maynard Keynes, but a giant experiment in which we will all be the subject.

Negative interest rates threaten to turn the whole financial world upside down — punishing savers and paying borrowers in a complete reversal of normal circumstances.

Investors wishing to protect their hard-won wealth in this distorted economic environment must quickly adjust. But how are assets likely to behave once negative interest rates are put in place? And will the centuries-old safe haven of gold still offer a refuge?

Why are interest rates going negative?

Negative interest rates are a shocking idea. After all, who in their right mind would pay someone to take their money?

The answer can be found by delving deep into the mechanism of the modern monetary system.

Central banks, which are responsible for monetary policy, adjust interest rates to control inflation. This impacts people’s ability to borrow money with mortgages, business loans and other forms of credit.

By keeping inflation at a certain level—usually 2-3%—central banks aim to create steady growth and economic stability.

In economic boom times, people will be confident in the future and borrow more funds—leading to more money sloshing around the economy and higher rates of inflation. To bring levels of inflation down, central banks will raise interest rates and curb the amount of borrowing—making it more attractive for people to keep funds in the bank, and more difficult for them to borrow. 

In economic downturns, people are less likely to borrow and spend and more likely to horde funds in the bank. To stimulate the economy, central banks will lower interest rates, incentivising commercial banks to stop storing cash with the central bank at a poor rate, and start loaning it out to businesses, making new ventures more economically viable, creating jobs and boosting the economy. 

At least, that’s the theory…

However, since the financial crisis in 2008, confidence in the economy has remained at a low ebb. People are saving more money, and banks are lending less. This has caused inflation and growth to stay below targeted levels, leading banks to continually lower interest rates.

But with interest rates now approaching zero, banks are forced to consider a last-ditch attempt to keep the economy afloat: negative interest rates.

This policy was tried for the first time in Sweden in 2009 as a temporary measure, and since then has been introduced by Japan and other European central banks.

At the moment, the negative rates are mostly confined to the domain of large financial institutions and governments, but they are gradually starting to trickle out from the upper echelons of global finance to high street banks. As seen in Denmark with the introduction of the world’s first negative interest rate mortgage in July 2019.

Meme by Megiddo47

What happens when interest rates go negative?

Twenty years ago, nobody would have considered negative interest rates to be a possibility. And even today, economists still disagree on the implications for the global economy.

Some policymakers, like President Trump, are keen to embrace negative interest rates to bolster economic growth.  Others are more skeptical, like JP Morgan’s Jamie Dimon who said negative rates are “one of the great experiments of all time”, and have “adverse consequences which we do not fully understand.”

One of the potential problems with negative interest rates is that they would not lead to more spending, but actually cause another catastrophic event — a bank run, where people rush to withdraw all their cash at once.

Whether this will happen or not is difficult to say, but banks are certainly likely to face squeezed margins and lower profits, which could discourage them from lending entirely and lead the negative interest rates to pull the economy down further into the quagmire.

Competitive high street banks may also be reluctant to pass on the negative interest rates to customers, for fear of losing them. This attitude is already playing out in Denmark, as the Housing Economist of Danish bank Jyske told The Guardian, “no bank wants to be the first mover into negative deposit rates.”

But with digital cash looming on the horizon, central banks are consolidating power over their currencies — tightening the reins over the money supply and ultimately gaining more power to enforce controversial policies like negative interest rates.

How to invest with negative interest rates

It is a commonly held belief among investors that high interest rates exert a gravitational pull on asset valuations — pulling prices down as investors choose to park funds in cash at the bank to earn regular interest.

Some investors even suggest that the only reason the stock market has performed so well over the last decade is because interest rates have been pushed down so low by central bankers.

On the surface, negative rates would seem to make holding cash even less attractive and further pump up the stock market as the yield of bonds falls.

But the enforcement of negative interest rates is likely to be triggered by very weak growth, or even a recession. This would create a “risk-off” environment that could counterbalance the appeal of equities.

Are negative interest rates good for gold? 

Gold and interest rates traditionally have a negative correlation, with gold prices going up as interest rates go down.

This correlation makes negative interest rates bullish for gold, and the metal is also likely to benefit from safe haven demand as the public begin to question the new and experimental central bank policy.

Until now, the impact of negative interest rates has been largely limited to central bank reserves. But when implemented in places like Japan, the results of pushing rates to the negative has been lackluster, with inflation falling instead of rising as the measure failed to stimulate the economy.

Interest rates in Japan

The danger is that the poor results could lead central banks like Japan’s to go deeper into negative interest rates, and potentially unleash even more bizarre and dystopian consequences — like mortgages that stretch for many decades to keep that sweet debt for as long as possible, or children being glad at the prospect of inheriting debt.

In this new strange world, the idea of sound money might just make more sense than ever.

Easily open your Swiss tax free gold vault in under 6 minutes

It’s Free to open a Swiss vaulting account, you can buy and sell gold directly to it instantly.

0 Comments

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Coronavirus-Infused Market Volatility is Bound to hit Australia and New Zealand

It now seems that Asian markets are recovering a bit. It is still too early to determine if the coronavirus crisis is under control in that part of the world.

Indian Officials Confiscate 9.3kg of Gold From Smugglers

What is rather interesting is how all of these bars have forged foreign markings. The objective of the individuals was to sell it in Mangaluru and districts of North Karnataka

Gold Bug Profile: Peter Schiff

Despite paying very close attention to investment options such as gold and silver, Peter Schiff isn’t optimistic about Bitcoin and other cryptocurrencies.

South Africa may Shut Down its Gold Mines due to the Coronavirus Crisis

This news coming out of Mongolia is rather surprising. Unlike other countries, it would appear that this region is still providing ample access to gold deposits.

Silver Bug Profile: Stewart Thomson

Many people keep an eye on the precious metals markets, as those segments have tremendous profit potential. Stewart Thomson can be classified as a silver bug, primarily because he expects things to head in a very promising direction.  Who is Stewart Thomson?...

Analyst Outlines how Silver is a Seriously Undervalued Asset Right now

Everything comes down to how things will evolve over the coming months. If the demand will pick up again, and the supply remains very limited, things may begin to shift in a few months from now.

Recent Actions by the Federal Reserve may Spark Demand for Gold and Silver

Such extreme measures often come at a long-term cost, however. While the measures taken allow for stock markets to rebound, it also devalues the US Dollar.

Gold Bug Profile: Ron Paul

Ron Paul has not always been a politician, however. He also serves as a flight surgeon in the US Air Force and performed duties as an obstetrician-gynecologist.

Gold and Silver Premium Prices Spike in Singapore and Hong Kong

Obtaining physical gold isn’t the only problem. Those businesses requiring a steady supply of silver are in an even bigger pickle right now

Gold Bug Profile: James Rickards

Back in 2009, he claimed that the US Dollar would face imminent hyperinflation. Moreover, the greenback was, in his opinion, vulnerable to attack by foreign governments.

Welcome To The New Bar9 Rebranding

To all Bar9 customers, I'm proud to announce the rebranding of Bar nine and a whole new informative front end. As we move into 2020 Bar9's mission is to make it easier for anyone to move in and out of physical hard assets and become a little more bank independent. The...

Silver Bug Profile: Jim Rogers

The dollar is, according to Jim, not a safe-have, and should be traded in for more stable long-term investments such as silver and gold.

Gold Bug Profile: Judy Shelton

It is interesting to note that Judy Shelton may join the Federal Reserve Board of Governors in the near future. Assuming that will be the case, some very interesting things are bound to happen in the near future.

Where is the Best Place to Buy Gold Online?

As far back as Ancient Rome, prospectors would sit aside streams swilling water in pans with the hope of glimpsing the yellow metal. Even today, you can still get your hands on gold in this way, but buying online through a broker is your best bet for a secure, cheap...

When And How To Invest In Gold

Dear Bar9 customers, unfortunately, we all live in extremely uncertain times. And the so-called "markets" in particular are also showing signs of nervousness: the price of gold, for example, goes up sharply one day, only to go down again the next. At the same time,...

Gold Bug Profile: John Paulson

It is also worth noting that the gold sector has treated Paulson rather well in his career. Back in 2010, he set a hedge fund record by making almost $5 billion in just twelve months.

Silver Bug Profile: David Morgan

Morgan prefers educating the masses on how a sound financial system would work. What we have in place as of right now is the exact opposite of a sound system

Gold vs Negative Interest Rates

The world is teetering on the brink of a new economic policy. Not one that was written about by capitalism's founding father Adam Smith, or even John Maynard Keynes, but a giant experiment in which we will all be the subject. Negative interest rates threaten to turn...

Best Practices When Using Mobile Payments During the Novel Coronavirus Outbreak

Solutions such as Apple Pay, Google Pay, Samsung Pay, and WeChat Pay are all perfectly usable during these troubling times.

Silver Bug Profile: Nathan Eric Fier

Many individuals have shown their love for gold, silver, and other precious metals over the years. Nathan Eric Fier is certainly a silver bug, although he pays close attention to gold as well. Who is Nathan Eric Fier? People with a link to the financial industry will...

Translate Blog Post

Article Categories

Blog Stats

  • 59,172 hits

Follow the CEO on Twitter

%d bloggers like this: