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LAWRIE WILLIAMS: NIRP, Equities, Gold – an uneven balancing act

A few days ago the World Gold Council published a special report on gold’s performance in a negative interest rates environment which made for interesting reading.  For years anti-gold commentators have been at huge pains to point out that gold is a bad investment because it pays no interest, but with negative interest rates one is paying banks and governments to hold your money and in those circumstances gold, which in general retains its value (with the occasional blip) becomes the better investment.  And that is very much the situation in which we find ourselves at the moment – and possibly for some time to come.

A very revealing, and rather alarming, article by Porter Stansberry The 'Metropolitan Plan' for when the dollar collapses… points out that already the Eurozone and Japan have implemented negative interest rate policies (NIRPs) and that the latest moves in Hong Kong, where the overnight Hong Kong interbank offer rate, which determines the rate that banks in the city have to pay to borrow Chinese yuan from each other, fell to negative 3.725%, suggests that mainland China may not be far behind.  All this negative interest rate setting is part of the ongoing currency wars where nations are trying to reduce the values of their currencies against those of their competitors in global trade.  How long is it before the U.S.A. has to follow suit in order to prevent its whole exporting sector becoming completely uncompetitive on world markets and further dragging down the U.S. domestic manufacturing sector, which is already experiencing PMI ‘s of below 50?

Interestingly, despite these negative rates appearing elsewhere, the dollar index has weakened from around 100 at the beginning of the year to below 95 at present which suggests there are also other forces at play here.  One doubts that the U.S. Fed wants to see a stronger dollar and there are probably moves behind the scenes to control any propensity for the dollar to rise despite the NIRPs being implemented by major rivals.  This is perhaps yet another sign that Fed moves to carry on raising interest rates may yet be further away than some might suggest.  Jim Rickards suggested recently that there is in effect an unspoken agreement whereby the major currencies are weakened together – but against what?  Gold maybe.

Indeed Stansberry points to the recently reported decision by one of the world’s largest insurers, Munich Re., to hold a significant part of its reserves in cash and gold.  Negative overnight deposit rates,meaning that money deposited one day is automatically worth less the following morning, mean that other major holders of cash who need instant access to it, may well start to consider doing the same as Munich Re – indeed a number of prominent high-wealth individuals have already gone public in admitting that they hold gold and gold derivavtives and reminding us that gokd has protected wealth since time immemorial.  And if this starts to become even more apparent then funds will follow suit too and gold becomes a true safe haven for the big money.  What will that do to the gold price which is currently showing strong resistance against falling back any more after its recent big rise?

Stansberry even raises the possibility of a return to a partial backing of the dollar by gold – in other words a return to at least a partial gold standard, to revive confidence in the greenback and dollar-denominated bonds.  He suggests that this could be achieved with a gold price of around $10,000 used to make U.S. government bonds redeemable for gold, and utilising the U.S.’s big gold reserves to do so.

But the overall message of the article was that the global economy is in serious trouble and that the imposition of negative interest rate policies globally would have far-reaching ramifications and would be particularly negative for the global banking sector.  They could prompt a run on banks to withdraw cash, a proportion of which might be used to buy gold, or other readily storable hard assets.

Stansberry also raised the spectre perhaps not of outright gold confiscation by governments but at least legislation to ban new purchases of gold by individuals or funds in order to help protect the banks.  And he points to the current moves into gold by some of the biggest investor names as something of a pre-emptive strike on their behalf.  Perhaps we should all be warned.

If Stansberry is right in his analysis of what the future holds in store for us we could well be in for some very difficult times financially.  Can governments muddle through as they have done in the recent past or are indeed the world’s fiat currencies heading for collapse as a number of observers warn us?  Gold could well be one of the best ways of preserving wealth if the worst happens.  The true financial insurance policy indeed.

Equities may have had a good run in the wake of all the central bank initiated financial stimuli, but these are currently looking very shaky, while gold is perhaps showing continuing signs of reversing its four year downturn.  The balancing act does indeed look to be at last coming down in favour of precious metals.

05 Apr 2016 | Categories: Gold, Dollar

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