The Impact of Negative Interest Rates

The effect of negative interest rates:

Across the pond, Denmark, Sweden, and Switzerland (and let’s not forget Japan) have adopted a negative interest rate policy. This policy effectively means that commercial banks must pay to hold excess cash on deposit with the central banks. Now one must ask, how low can the negative rates go and how does the average investor navigate this landscape?

Over the years, the word inflation was synonymous with higher gold prices, but in my opinion negative interest rates will have a much more profound effect on the price of gold. As an investor, why would anyone want to pay the bank to hold their money. And with more and more European people who are reaching retirement age and having to deal with reduced retirement benefits, there is a concerted effort of many to find a higher rate of return that banks can no longer offer.

Tomorrow we will hear from ECB President Mario Draghi. He has a tough job and I expect he will have limited tools to work with. Additional stimulus will be needed in the EU, but even this tool seems to be losing its effectiveness. There are so many problems to address in the EU. A recession continues to plague many countries. Migrants are entering by the thousands and governments have no means to support them. Unions are still trying to strong arm governments that have no ability to pay for those promised benefits. Not a pretty picture.

That’s why we see an increase virtually every day in ETF holdings and an increase in physical demand in the countries I mentioned above. Yes there have been counter forces driven by comments from the FED governors saying a rate hike is still in the cards, but I believe as I commented before that it’s just a ploy by our Federal Reserve to give central banks time to purchase more gold at attractive rates. I expect a “no” vote on rate hikes by our Federal Reserve next week, which in turn will help fuel gold to higher levels. In the meantime, we see lower gold prices this morning, as oil and the dollar trade higher. The question remains, do the longs have the patience to wait for Draghi’s comments, or sell gold and take some profits at these levels?

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.