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What Happens to Gold in a Negative Interest Rate World?

Bloomberg recently reported, “Investors are buying gold as an alternative to hold Swiss franc cash deposits, according to Vontobel Holding AG, a Swiss bank and wealth manager.”

And it’s not only Switzerland that is experiencing this new trend. According to The Wall Street Journal, “One of the biggest factors behind gold’s rise has been negative interest rates.”

What do negative interest rates mean to savers? If you have a $200,000 savings account with a 1% negative interest rate yield, at the end of the year you have $2,000.00 less dollars.

This is a new monetary phenomenon. The rationale behind negative interest rates for banks is with lower rates it eases the burdens on debtors to create a spending environment for households and for businesses to invest. So far the experiment isn’t working as planned and savers have rotated into buying gold for safety.

One of the biggest criticisms to owning gold is it pays no yield. That’s historically been true, but with major countries like Switzerland, Denmark, Germany and now Japan embracing negative interest rates, investors’ views on owning gold have begun to change.

Negative interest rates leave savers with few choices. They can pay the “bank tax,” choose to hoard cash and store it outside the banking system, or buy physical gold and silver as a hedge.

But it’s not just household investors that are seeking protection. Pension funds and foreign reserve managers with strict investment guidelines need to look for safety as well like Munich Re Group, one of the world’s largest reinsurance companies located in Germany.

They are responding to negative interest rates by hoarding tens of millions in cash as well as holding almost 300,000 ounces of gold.

Ashish Bhatia, director of central banks and public policy at the World Gold Council sums it best, “In a negative or low yield environment gold performs well as opportunity cost [for holding gold] is less and it increases risk for fiat currencies.”

The World Gold Council believes if this trend continues it could be good for gold in the long-term by looking at past results. “History shows that, in periods of low rates, gold returns are typically more than double their long-term average.”

With the current deflationary trends in Japan and Europe, central banks continue to introduce more monetary stimulus, which in turn lowers yields and pushes them into negative territory.

No one knows how this experiment will end, but so far gold and silver have been this year’s winner. To learn more about purchasing gold and silver as protection against negative interest rates, call one of Berkshire Gold Direct’s precious metal specialists. You can reach them directly by calling 1.800.614.8221.


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