Gold Market Trends & Negative Rates
Updated Feb 2023
Conventional wisdom states that precious metals trend upward when rates are rising. We live in strange times, and central bankers are breaking the left, right and centre rules, so this old paradigm might not hold. If the masses are forced to speculate, they could decide that Gold is a better storage of wealth. However, for that to pass, the average Joe would have to understand the true meaning of the word inflation and that Gold is a currency, not some ancient relic that has no place in the 21st century.
This will not be an easy feat, so while we expect Gold to trend higher in future years, the next bull run will not begin with a bang. Another possibility to consider is that if the cost of holding money in a bank becomes prohibitive, it could trigger a run on the banks. We will examine this issue in more detail in a follow-up article.
Negative Rates & Gold Market Trends: Deadly Duo?
Negative rates are an untested experiment. Right now, the majority of the world is embracing negative rates. The U.S. and a few other nations are the only standouts. However, they will be forced to take the same path sooner or later. Once that is done, any advantage that negative rates conferred will be gone. As no significant country out there will be offering positive rates. Hence, the destructive race to the bottom will gain traction. Why? Each nation seeks to debase its currency further to gain a competitive edge. In this environment, eventually, Gold could do well, but for that to occur, the masses would have to understand that Gold is a currency; for now, they still believe that Gold is an ancient relic.
How does one become a butterfly?” she asked pensively. ”You must want to fly so much that you are willing to give up being a caterpillar.”
Trina Paulus
Gold and Negative Interest Rates: An Uncharted Territory
The global economy has been grappling with the consequences of negative interest rates, a monetary policy experiment that many countries worldwide have adopted. However, this untested approach has created significant uncertainty among investors, who now question the viability of traditional asset classes like gold in a negative rate environment.
Historically, gold has been viewed as a safe-haven asset that can preserve wealth during economic uncertainty. However, the performance of gold in a negative rate environment is far from clear. While lower interest rates can reduce the opportunity cost of holding gold, negative rates may not necessarily translate to lower borrowing costs for individuals and businesses, which could limit the stimulative effect on the economy and ultimately hurt demand for gold.
Furthermore, the destructive race to the bottom that negative rates have created has the potential to impact gold’s performance in unexpected ways. As nations debase their currencies further to gain a competitive edge, the value of fiat currencies could decline, potentially leading to increased demand for gold as a currency and a store of value.
Examining the Uncertain Relationship Between Gold and Negative Rates
However, for this scenario to occur, the masses would have to recognize that gold is a currency rather than an ancient relic, a notion that is still widely disputed. In addition, the potential for deflationary pressure to cause the value of the dollar to increase could reduce demand for gold as a hedge against inflation.
Overall, the relationship between gold and negative rates is an uncertain one. While gold has the potential to perform well in a negative rate environment, it isn’t easy to make definitive predictions about its performance without considering a variety of factors, including broader economic trends, the relative attractiveness of alternative assets, and public perception of gold as a currency.
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