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Why Did Negative Rates Spur the Demand for Gold?

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Negative rates help gold

So far, it has been a glorious quarter for precious metals. Gold rose 16.5% on a year-to-date basis. Silver and platinum rose about 17% and 9.6%, respectively, during the same timeframe. Gold saw its best quarterly performance in the last three decades. The safe-haven demand at the beginning of the year and global unrest impacted the sudden rise in precious metal prices.

Many nations are taking their interest rates negative to support their respective economies. The Bank of Japan and European Central Bank are among the top players that chose negative rates. Denmark, Sweden, and Switzerland also joined the league.

Negative rates often provide impetus to non-yield bearing assets like gold. Traditionally, gold is a favorite investment option. It sees a surge when returns are low. With negative interest rates, an investor would rather park money in valuable metals than pay for the investments.

Japan eyes gold

Gold bar sales in Japan rose by 35% to 8,192 kilograms in the three months ending March 31, 2016—compared to 2015. According to the WGC (World Gold Council), consumer demand in Japan almost doubled in 2015 compared to the previous year. Reports by the WGC suggest that in periods of low interest rates, gold returns are typically more than twice their long-term average. Over the long run, negative interest rate policies could result in structurally higher demand for gold from central banks and investors.

The funds that could react quickly to the price changes in gold and other precious metals include the SPDR Metals and Mining ETF (XME), the Global X Silver Miners ETF (SIL), the Sprott Gold Miners (SGDM), the VanEck Vectors Gold Miners ETF (GDX), and the ProShares Ultra Silver (AGQ).

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