Editorial: Negative interest rates give gold a boost

One of the themes already emerging for 2016 is the oxymoron of “negative interest rates.” And if you’re a gold bug who’s been loving the low interest rates of recent years, you’re over the moon about this once-inconceivable development.

Until recently, it was assumed — simple souls that we were — that the lowest that policymakers running central banks could go in dropping nominal interest rates was zero.

But in the last two years we have entered a global banking era where it is increasingly common and acceptable in genteel circles for central banks to adopt negative interest rates — in effect, charging commercial banks for the privilege of holding their reserves with the central bank.

As we step into 2016, countries and regions representing a quarter of the world’s gross domestic product have now adopted negative interest rates, including the eurozone (adopted in June 2014), Switzerland (December 2014) and Japan (January 2016).

Central bankers argue these sub-zero interest rates have several benefits, at least in theory: they encourage commercial bankers to lend money to avoid charges on non-mandatory reserves; they lower the value of a nation’s currency to encourage exports and increase inflation as imports become more expensive; they make equities more appealing compared to bonds; and they may dovetail nicely with other stimulus measures, such as quantitative easing.

However, as negative interest rates are adopted worldwide, there are plenty of examples of the opposite happening, particularly as commercial banking profits get squeezed, forcing banks to restrict lending and pass on higher borrowing costs to customers.

But what really roiled the world markets in mid-February was U.S. Federal Reserve Chair Janet Yellen’s testimony before the U.S. Congress, in which she stated that, despite concerns, the U.S. central bank could adopt negative interest rates should it choose to do so. It’s the boldest statement yet that negative interest rates are on the table in the world’s biggest economy, and economists are pondering whether Canada may be next up to adopt sub-zero rates.

U.S. stock markets plummeted and gold prices shot up more than US$55 per oz. on Yellen’s remarks, peaking intraday at US$1,260.80 per oz. on Feb. 11. Gold prices have since settled down just above US$1,200 per oz., but it was a strong move that burst decisively through the psychological US$1,200 per oz. barrier, and suddenly got gold investors thinking about US$1,300 gold again. At press time, gold prices are up US$114 per oz. over the last 30 days, or 10.5%.

Even better for gold investors is that long beaten-down gold mining and exploration stocks once again showing leverage to gold prices. Since the start of the year gold prices have risen 15%, but gold mining equities are doing substantially better, with the Market Vectors Gold Miners ETF, which tracks large gold miners, up 37% (after having dropped over 70% since the most recent gold peak in 2011).

By contrast, the S&P 500 has fallen 9% so far this year, the Dow Jones Industrial Average is off 8% and the tech-heavy Nasdaq has dropped 13%. European and Asian stock markets have plunged even more.

Clearly, gold’s role as a safe haven during times of economic trouble has come roaring back to life in 2016.