The big beneficiary of negative rates: Gold Price
New York (Feb 13) 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. Prices are up nearly 18% in 2016, making the precious metal one of the top performers this year after it lost 40% during the previous four years.
One of the biggest factors behind gold’s rise has been negative rates. The Bank of Japan last month joined a growing number of central banks, including the Swiss National Bank and the European Central Bank, when it introduced negative interest rates in an effort to spur consumer spending. Sweden’s central bank said on Thursday it was moving interest rates further into negative territory, and warned it could cut again. Canadian officials are also weighing cutting borrowing costs below zero.
And Federal Reserve Chairwoman Janet Yellen said this week the U.S. central bank is studying the feasibility of pushing short-term interest rates into negative territory if needed.
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, a concern that has boosted the value of haven assets such as the Japanese yen, Treasurys and gold.
“The fear trade is very strong,” said Peter Hug, global trading director at Kitco Metals. “People are selling and the cash has got to go somewhere. Right now, it’s going into gold.”
Gold mining stocks have been among the market’s top performers. Canadian miner Barrick Gold Corp., the world’s largest gold miner by output, has surged 63% year to date. Newmont Mining Corp. is up about 40%, and Randgold Resources Ltd. has gained 48% this year. Exchange-traded funds that buy gold are reporting their biggest inflows in more than a year.
At the same time, investors are fleeing European and U.S. banking stocks over worsening financial-market conditions and concern about exposure to falling oil prices.
“Anytime there are concerns about the financial system, you’re going to have investors who at the very core distrust banks, and therefore would rather seek the safety of gold,” said Joe Kalish, chief global macro strategist at Ned Davis Research, a Venice, Fla. research firm for institutional investors.
Speculative interest in gold has become more positive in recent weeks. Net bets in the $60 billion a day gold-futures market by hedge funds and other investors turned bullish in January, after being positioned for a decline in gold prices since mid-November, regulatory data showed.
David Einhorn’s Greenlight Capital Inc. said in a January investor letter that gold was among its biggest wagers. Mr. Einhorn, a longtime investor in gold, has said previously that he holds the metal “in case things go haywire.”
The gold rally could peter out if economic growth picks up, or if central banks move away from negative rates. Even some famous investors have stubbed their toe trying to gauge gold’s direction.
Source: WSJ
