IN A HISTORICAL FIRST GOLD NOW PRODUCES
A “POSITIVE YIELD” One of the major criticisms of gold ownership is that it produces no income except for central banks that have been able to loan it out. Now for the first time ever, gold provides a “positive return” at zero when compared to the negative yields in many countries in Europe and in Japan.
It is estimated that approximately $16 trillion worth of the global debt market has negative yields, which means some investors are becoming so risk averse that they are willing to pay to hold bonds.
ACCOMMODATIVE CENTRAL BANK POLICIES And it appears that these negative yields are likely to become even more negative, as additional stimulus is needed in Europe and Japan. Also, countries that have positive interest rates are lowering them to varying degrees, or are in a frame of mind to do so. For example, the Federal Open Market Committee of the U.S. Federal Reserve lowered its fed funds rate in July by 25 basis points after an almost 13 year span of increasing its fed funds rate. The rate went from 0.0%-.25% to 2.25%-2.50% and now after the July reduction it stood at 2.00%-2.25%. Additional rate cuts from the FOMC are priced into the market.
The European Central Bank at its September 12th policy meeting reduced its deposit rate by 10 basis points to a record low negative 50 basis points and promised that interest rates would stay low for longer and it would restart bond purchases at a rate of 20 billion euros a month ($22 billion) starting November 1. The ECB is restarting a quantitative easing program that it only phased out last December. The new quantitative easing program will “run for as long as necessary,” according to the ECB.
The Bank of Japan is in an accommodative mood as well. Officials have recently said the central bank won’t hesitate to “consider” easing, if the economy loses momentum towards hitting its price target.
CENTRAL BANKS AGGRESSIVELY BUYING GOLD In addition to the newly found “positive yield” advantage for gold, the yellow metal has attracted the interest of central banks. In 2018, central banks bought the most gold by volume since 1967. Central bank net purchases reached 651.5 metric tons in 2018, which is 74% higher than in the previous year when 375 tons were bought. In the first half of this year, central banks bought 374 metric tons of gold, according to the World Gold Council, which is the largest net increase for the first half of the year since at least
2000.The World Gold Council estimated that central banks now hold nearly 34,000 tons of gold.
So what do central banks see now and why have they collectively bought so much gold? Inflation appears not to be a problem, as many countries are struggling to meet inflation targets. Also, there are no indications that global inflation rates will accelerate anytime soon. Are there other factors at work driving the price of gold up to a six year high?
One rule of thumb to keep in mind is that often it can be financially advantageous to follow what the strong hands are doing in any market and currently that would include gold.
CENTRAL BANK NET PURCHASES REACHED 651.5 METRIC TONS IN 2018, WHICH IS 74% HIGHER THAN IN THE PREVIOUS YEAR WHEN 375 TONS WERE BOUGHT.
6 | ADMISI - The Ghost In The Machine | September/October 2019
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