Negative Interest Rates a Positive for Gold

Negative interest rates are becoming more and more in vogue and that could be good news for gold.

Last week, Sweden’s central bank plunged a key interest rate even deeper into negative territory. Riksbanken slashed the rate from negative 0.35% to negative 0.50%. Many analysts anticipated the rate reduction, but the magnitude of the cut caught most by surprise.

The Swedish central bank’s move followed on the heels of the Bank of Japan dropping a key interest rate to negative 0.1%. The Japanese bank indicated it was willing to go deeper into negative territory if necessary.

Canadian officials are also talking about negative interest rates, according to the Wall Street Journal.

As we reported recently, negative rate could be right around the corner in the US as well. Janet Yellen said the Federal Reserve is studying the feasibility of dropping rates below zero during congressional testimony last week, saying the central bank should be prepared to take that step of the economy sinks.

According to a Wall Street Journal report, the proliferation of negative rates around the world is good news for gold.

Investors are piling into gold, seeking shelter amid concerns that a turn toward negative interest rates in some countries is threatening to destabilize the global financial system. Gold futures soared 4.45% to $1,247.90 an ounce on Thursday, its highest level in a year…One of the biggest factors behind gold’s rise has been negative rates.”

Negative rates effectively place a tax on savings. Your options are to spend your cash, stuff it under your mattress (or hide it in your microwave as some Swedes have reportedly done), or pay the bank to save it for you. When rates fall below zero, gold become an even more attractive safe haven. As the WSJ explained it:

Gold typically struggles to compete with any yield-bearing investments when interest rates rise, but that disadvantage matters less when borrowing costs are negative, opening the path for more investors to hold the metal. Its rally is another sign of how fearful some gold investors have become that central banks are increasingly powerless to prevent a financial meltdown…”

Janet Yellen still keeps saying the economy is fine, but even the mainstream is starting to talk about a looming recession. Peter Schiff has been saying we are already in a recession, and last week, Jim Grant agreed with Peter, saying the US went into recession late last year.

So, even as the Federal Reserve chair keeps her head buried in the sand, the signs point more and more in the direction Peter has been pointing since the December rate hike. Each day, we get more data that suggest the Fed will have to reverse course and drop back to zero. After that, it will have little choice but go negative and launch another round of quantitative easing.

As the WSJ said, that’s great news for gold.

Gold historically rallies when interest rates are expected to remain low or decline…Gold performs well during periods of extreme duress.”

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