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How Does a Negative Interest Rate Policy Affect Gold Investments?

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Nov. 20 2020, Updated 4:21 p.m. ET

Negative interest rate policies

Worldwide, central banks are trying to devise ways to kick-start their economies. After bond buying and cutting interest rates all the way back to zero did not work for central banks, they are testing even more unconventional ways, such as the NIRP (negative interest rate policy). Under a NIRP, people are charged on their deposits with banks, and banks are charged for their deposits with the central bank. This dissuades idle cash balances and artificially boosts demand.

How Does a Negative Interest Rate Policy Affect Gold Investments?

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Going below zero

The European Central Bank, Denmark, Switzerland, Sweden, and Japan (EWJ) have implemented a NIRP. While a NIRP seems to be a far-fetched idea for the United States (QQQ), the Fed had asked the banks to prepare for the possibility of a NIRP. Right now, it is being done as a stress test to see how the banking system could be affected by it.

Implications for gold investors

This scenario bodes well for gold investors. As gold doesn’t yield anything, it tends to perform well when interest rates are low and even better when they are negative. According to reports by Bloomberg, in Japan, gold is in strong demand due to negative interest rates. Investors are not willing to invest in bonds at negative yields. This is also the case for other countries with negative interest rates such as Germany. To counter the negative interest rates, Germany’s re-insurer, Munich Re, has boosted its gold and cash reserves. If this scenario continues, it should support gold and gold equities such as Agnico Eagle (AEM), Gold Fields (GFI), and New Gold (NGD).

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