Negative Interest Rates – Good For Gold?

Why negative interest rates can be a very bad thing for the European economy, but good for the price of gold.

Ever since Janet Yellen was asked about the possibility of the FED adopting a negative rate policy, the topic has been discussed and analyzed all over the internet and in financial publications.

In order to understand what could happen here in the States, we need to look at where negative interest rates are a fact of life.

On March 10th the European Central Bank (ECB) cut rates, charging banks from 0.3 to 0.4 percent to hold cash overnight, putting Denmark, Sweden and Switzerland in negative territory. So if you are a banker in Europe, what can you do in order to eliminate this cost? I guess you don’t have much of a choice. You need a return on your cash so you make new loans.

This situation has the potential to spark a couple of scenarios that would both impact gold:

  1. Some would think this might drive banks to make more risky loans in order to make the bank more profitable, right? Hm…risky loans sound familiar? Remember when banks issued a significant number of mortgages to unqualified borrowers who bought houses that they couldn’t afford…leading ultimately to 2008’s Financial Crisis? Of course, that dark time was driven by more than just a need to be merely profitable…it was spawned by greed that lead to the “big short” or risky loans on steroids. So, if more risky loans are indeed written…regardless of the reason…shouldn’t that be cause for concern and possibly inspire more investor faith in say…gold?
  2. With European banks charging everyday customers a fee for keeping money on deposit in the bank, in addition to all the problems that the average Joe is facing in Europe these days (the inability for governments to meet pension obligations, the tremendous influx of migrants who must be fed and housed putting a strain on the EU balance sheets, reoccurring tragic violence as we just saw in Brussels) where will the average investor put their money? Does gold again sound like the answer?

So now that they are convinced that Gold is the investment of choice in an negative interest environment, what happens if this hits our shores?

I can see it now, with interest rates below zero major banks will be pressed to show profits and invest in risky high yielding assets. (Again, sounds like 2008, right?) Consumers will pull cash out of banks and hold their cash, because they will be charged by the banks to hold their money and in turn reduce spending. This affects the bottom line of businesses all over the U.S.

Did I paint a clear picture on what can happen here if negative interest rates become a reality? Remember where gold was in 2008 and the rally we witnessed in gold in the four years that followed as the economy tried to recover?

Definitely worth pondering and watching.

Have a wonderful Wednesday.

Disclaimer: This editorial has been prepared by Walter Pehowich of Dillon Gage Metals. This document is for information and thought-provoking purposes only and does not purport to predict or forecast actual results. It is not, and should not be regarded as investment advice or as a recommendation regarding any particular security, commodity or course of action. Opinions expressed herein are current opinions as of the date appearing in this editorial only and are subject to change without notice and cannot be attributable to Dillon Gage. Reasonable people may disagree about the opinions expressed herein. In the event any of the assumptions used herein do not come to fruition, results are likely to vary substantially. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions and each investor should evaluate its ability to invest for a long term especially during periods of a market downturn. No part of this editorial may be reproduced in any manner, in whole or in part, without the prior written permission of Dillon Gage Metals. This information is provided with the understanding that with respect to the opinions provided herein, that you will make your own independent decision with respect to any course of action in connection herewith and as to whether such course of action is appropriate or proper based on your own judgment, and that you are capable of understanding and assessing the merits of a course of action. You may not rely on the statements contained herein. Dillon Gage Metals shall not have any liability for any damages of any kind whatsoever relating to this editorial. You should consult your advisors with respect to these areas. By posting this editorial, you acknowledge, understand and accept this disclaimer.