Contact us
CALL US NOW 1-888-GOLD-160
(1-888-465-3160)

Negative Yields, Opportunity Cost and Gold

  by    2   0

company-dickson-buchananThis article was written by Dickson Buchanan, SchiffGold Precious Metals Specialist. Any views expressed are his own and do not necessarily reflect the views of Peter Schiff or SchiffGold.

Last week, I published an article on the causes and consequences of negative interest rates. In it, I talked briefly about how negative yields hold significant implications for gold as an asset class. In this followup article, I will explain why that is.

Capital and Negative Yields

Capital in waiting – capital sitting on the sidelines waiting for a good investment opportunity – typically gets parked in government bonds. This is true for a number of reasons. Bonds are less speculative compared to most assets. The only risks are a sudden rise in yields or a fall in the denominated currency if it’s a foreign bond. Of course, some governments and jurisdictions are less appealing than others, as anyone with exposure to Greek bonds will tell you.

Despite a less than perfect track record,  government bonds are still considered the “risk free” asset. Setting aside whether they truly are“risk free” (they aren’t) they are certainly less risky than buying a stock, or trading a commodity or a piece of real estate. In the former two options you risk immediate price exposure with every tick, and in the latter, there are natural liquidity restraints. Additionally, the bond market is the only market big enough and liquid enough to absorb this kind of capital. If you are thinking about money in the bank, make no mistake, there are little to no physical cash reserves sitting in the bank. All the deposited funds are moved into another asset at the bank’s discretion within regulatory restraints.

With bonds, capital earns a small yield. Given the decade long trend in interest rates, the yield earned has been falling, falling and falling. Due to our modern monetary madhouse, we are now seeing negative yields. The following chart shows the yield curves for Japan and Germany from 3 months out to 15 years.

paying to save

That’s not the worst of it. The 10-year Swiss Bond is currently trading at -0.338 yield. We will come back to this number later.

Gold and Negative Yields

As opportunities for yield in the marketplace decrease, capital in search of better opportunities must now consider the adverse effects of being charged a negative yield to play it safe. In such an environment, non-yielding assets, which at one point looked unattractive, will begin to look much more attractive compared to the negative yielding bonds.

What happens to be the largest non-yielding asset in today’s financial markets?

Gold

Gold is the largest non-yielding asset market today. The market for gold is deep enough and liquid enough to attract large amounts of capital under similar market conditions as government debt. However, unlike government debt, gold has no counterparty risk. Therefore, the true bearer of the title “risk free asset” should go to gold – not T-bills or whatever other names government paper has. This is because gold is liquid under all market conditions.

Of course, there is a cost to buy and store gold. But in our negative yield environment, if the cost of buying and storing gold is at par, or close to par, with the negative yield your capital would pay in a government bond, then we would expect a portion of that capital to flow into gold instead of the government bond.

Let’s revisit the 10-year Swiss bond yield of -0.338. If you were to consider putting $10 million in a 10-year Swiss Bond, you would be paying $33,800 to own that asset. If you could acquire gold bullion stored in the secure vault of a trusted third party for 0.25%, then your cost of allocating the same amount of capital only comes to $25,000. Simple alternative analysis shows that there will at least be some portion of capital that will opt for gold over the government debt. This is especially true in a post 2008, post Cyprus, post Greece financial arena. As we wrote in our previous article, in a negative rate environment banks may have to choose between the lessor of two negative rates. Gold offers a different and in many ways better bid on large amounts of capital that needs to parked and preserved for the future. .

It’s important to remember that this kind of optionality wasn’t on the minds of most people 10 years ago. But it is now a reality that many are facing. In fact, we expect the dynamic of capital flowing into gold to only gain momentum if yields continue to fall further into negative territory. Moreover, if any of the large government debt players go bust, like Japan for instance, then we would really expect large capital inflows to move into gold.

In summary, negative yields lower the relative opportunity cost of owning gold compared to other similar assets.

TaxFreeGold.Banner.1000x285

Get Peter Schiff’s most important Gold headlines once per week – click here – for a free subscription to his exclusive weekly email updates.
Interested in learning more about physical gold and silver?
Call 1-888-GOLD-160 and speak with a Precious Metals Specialist today!


Related Posts

The Fed Is At It Again: Another $100 Billion Cash Injection

A week ago, nearly $100 billion in short-term liquidity was added via the Federal Reserve Bank of New York offering cash in the repo market. As a reminder, the repo market is the overnight market of repurchase agreements. This is where one sells an asset with an agreement to purchase it back at a slightly […]

READ MORE →

Peter Schiff: The 20’s Will Be An Explosive Decade for Gold

In 2019, gold had its best year since 2010. Peter Schiff appeared on the RT Dec. 31 and said he thinks the yellow metal should have done even better. And given the current economic conditions, he believes the 20’s will be an explosive decade for gold. You know, the reason the US stock market went […]

READ MORE →

A Trend Worth Considering – The Price of Gold Since 1971

As we approach the end of 2019, gold is on track for a healthy yearly gain. To date, the yellow metal is up over 16% on the year. It’s always interesting talking about gains in the price of gold because when you get down to it, it all depends on when you got into the […]

READ MORE →

Updated and Revised Report: The Student Loan Bubble – Gambling With Your Future

Have you heard? The Democrats are going to fix the student loan mess! They’ve brought up the issue in almost every  Democratic Party presidential debate. All we need is a good government program and we can easily solve this $1.64 trillion problem. Never mind that government programs caused the problem in the first place. Just […]

READ MORE →

Peak Irony: Fed Paper Admits Fed Policy Can Lead to Economic Ruin

A paper  by Scott A. Wolla and Kaitlyn Frerking for the Federal Reserve Bank of St. Louis warns that the Fed’s own policy could lead to “economic ruin.” The paper titled “Making Sense of National Debt” explains the pros and cons of national borrowing in typical Keynesian fashion. In a nutshell, a little debt is […]

READ MORE →

2 thoughts on “Negative Yields, Opportunity Cost and Gold

  1. Hi. my name is john francix. i saw your advert online i now want to confirm mayb is a valid email or not because i want to purchase some golds thanks

  2. David Raymond Kays says:

    What happens to my gold in a cashless society? How will I be able to buy necessities with gold or other metals when a system does not exist to use
    them as money?
    If that did exist I would buy all the gold and silver I possibly could. I own about 100 ounces if silver

Leave a Reply

Your email address will not be published. Required fields are marked *

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

Call Now