Central bankers look hell-bent on making gold bugs of us all with NIRP...
GOLD tends to do well when other assets fail to perform, but it does best when people lose faith in central banks, writes Adrian Ash at BullionVault.
That makes negative interest rate policy (NIRP) look like a big driver of 2016's gold price surge so far.
NIRP has rightly scared a lot of big-money investors, because it looks so wildly desperate that it must signal real panic amongst European and Japanese central bankers – famously a sober, boring set of bureaucrats. Second, it also raises such a big question-mark over the US Federal Reserve's apparent wish to hike Dollar interest rates again after December's baby-step to 0.5%. That is creating volatility across all financial markets.
It's worth remembering that, where NIRP has been imposed, it currently applies only to
money held by large commercial banks at the central bank (indeed, it is charged only on the bank's "excess reserves", over and above the sum of money it must hold with the central bank to meet its regulatory requirements). What's more, imposing negative rates on actual savers
could face legal challenges (something Fed chair Janet Yellen spoke about in her regular testimony to US lawmakers in February. You'll note that means she's been thinking about it).
But while NIRP currently doesn't apply in the US, China or UK, it does apply in the Eurozone (the world's single largest economic union), in Japan (the world's 3rd largest national economy), and Switzerland (formerly a "safe haven" for bigger investors).
If the policy aims to boost lending and investment, by forcing banks to hold less money on their balancesheet, so far it has failed. Japanese bank lending has failed to grow, and excess deposits at the European Central Bank
have risen to 4-year highs even as the ECB has raised the cost of leaving money with it. The only success has come in
reducing market interest rates by pushing yet more money into government bonds at yet higher prices.
That makes gold look remarkably attractive to large money managers. First because NIRP, like its crazy promoters and their crazier outcomes, speaks directly to
the gut-level case for buying gold. Second because it has become cheaper to vault physical bullion than to lend short-term money or to park funds in longer-term government debt.
Negative deposit rates in the Eurozone and Japan are now approaching commercial storage charges on physical bullion, while Swiss Libor and the Swedish Riksbank's deposit rate already exceed even the higher fees of gold-backed ETFs. The cheapest major ETF is the iShares Gold Trust (NYSEArca:IAU) at 0.25% per annum. The biggest gold ETF is the iShares SPDR (NYSEArca:GLD) which costs 0.40%. Commercial storage rates for large-bar gold, in contrast, are nearer 0.10%. Customers of BullionVault pay
just 0.12% per year (with insurance included) to vault in their choice of London, New York, Singapore, Toronto or Zurich.
So it is already cheaper to hold gold than some near-cash assets. And one can only guess at the impact on inflows to gold if NIRP does reach money itself, meaning the mountain of banking deposit accounts which today represent the most liquid means of exchange the world over.
Besides gold, a flight from negative-rate bank deposits would very likely spur a surge in demand for cash itself. Because that way, savers could enjoy liquidity without losing value to what would effectively be a tax. How could the authorities beat that natural urge amongst the public? Several theories were floated during the 2008-09 crisis about how to stop savers hoarding paper money (
time-stamped bills, for instance, basically turning cash into gift vouchers). The more-commonly discussed today is a ban on or the abolition of physical cash – something the general public is sleep-walking towards anyway by spurning notes and coins at the cash-desk and embracing contactless payments.
(
Quick aside: Research from the Federal Reserve Bank of Boston
counters this idea, saying that the big trend has been the death of check payments in favor of ACH and online transfers, while the San Fran Fed finds younger consumers in particular
seem very keen to continue using cash. But anything based on the US experience rather than, say, the UK, must acknowledge just how backward and slow-to-adapt the US banking system remains in 2016.)
But really? Killing of physical cash...just to trap you in bank accounts paying less than zero and so forcing negative interest rate madness on widows, orphans, businesses, savers and consumers alike?
Gold's jump so far this year? It just reflects professional money managers waking up to the fact that, yes, central bankers take the craziest ideas seriously. They get round to trying them in time.
Die-hard gold investors never trust the fiat money system. Central bankers today risk making gold bugs of us all.