Given an environment of low and even negative yields, slow growth and potential signs of rising inflation, Russ discusses why gold may continue to shine.
As my colleague Jean Boivin recently wrote, central banks are pushing the outer limits of monetary policy. This has had many odd side effects, not the least of which is a significant portion of sovereign debt today is trading at a negative yield. If you buy government bonds from Japan today, you’d have to pay interest. Welcome to a world in which investors pay for the privilege of lending money.
Although central banks have been the primary architect of this surreal state of affairs, even if they decide to reverse course, real borrowing costs are likely to remain low relative to the historic norm. Factors such as demographics and tepid economic growth are contributing to the unusually low level of real interest rates (i.e., after inflation).
All told, this is a serious problem for yield starved investors. Ironically, one potential remedy is to take a second look at an asset class that provides no income: gold.
Market Realist – Gold as an alternative asset class
With economic growth remaining subdued and inflation rates very low, central banks in many developed (IVV) (SPY) countries have adopted numerous stimulus measures and negative interest rate policies to boost their economies.
These policies appear to have negatively impacted government bond yields in many economies. Bond yields in the US (AGG) and in many other developed countries have declined drastically in the past year, making bonds a potentially unattractive investment.
Bloomberg estimates that around 30% of the global government bond market is trading at a negative yield while some corporate bonds in select markets are also trading at negative yields. The ten-year government bond in Japan is trading at a yield of -0.10% while in Switzerland it is at -0.37%.
Similarly, the five-year government bonds in Sweden and Denmark are trading at a yield of -0.19% and -0.056%, respectively. When yields are negative, investors lose money on maturity.
Interest rates are likely to remain low
Given the tepid global economic growth, lower inflation, aging population, and declining labor supply growth, interest rates in many developed markets are likely to remain low in the next few quarters. Additionally, the global economy is suffering from lower demand, increasing liquidity, and lack of safe haven assets, thus pushing the real interest rates into negative territory.