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Negative Interest Rates and Gold

Maybe you have heard about the upcoming reversal in interest rates being considered by the Federal Reserve (the Fed).  After informing the markets of further interest rate increases for 2019 and 2020, the official guidance has shifted to neutral.  Furthermore, President Trump is calling for significantly lower interest rates, though it remains unclear how much influence he has on Fed policy-making decisions.  As interest rates were rising in 2017, we informed our readers that rate increases would be limited and likely to be reversed again, due to economic conditions.  It now appears to be happening in line with our projections.  While this is great news for precious metals investors, something even more impactful is going on that you may not have heard about.

Truth Stranger than Fiction

Whoever dreamed we would see the day when the architects of world finance would hatch a plan to impose negative interest rates?  There is currently over $10 Trillion worth of bonds paying a negative interest rate in the world today, from 3-months to 10-years in duration.  What does this mean?  This means there are significant numbers of bond investments that are guaranteed to be worth less at maturity than when initially purchased.  So the $1,000 you invested today would be worth $980 when the term is up, for example.  Many of these bonds have been issued across Europe and Japan, but it has not been possible or practical to issue such bonds here in the United States, until now.

Negative interest rate bonds are only one leg of the stool.  Let’s face it, not everyone purchases bonds directly, though many own them indirectly via their mutual funds or retirement accounts.  The “holy grail” of negative interest rates is tied to bank accounts, whereby policymakers can simply confiscate funds from a patron’s bank account, as a negative interest rate payment back to themselves.  Think of it as a new tax, in the form of a negative interest rate.  You deposit $1,000 into your bank account, and a year later you have $998 after earning -2%.  This is where they plan to take us, but not everyone has been willing to cooperate.  But as we pointed out earlier, many in the US have unofficially been earning negative interest rates of -2.74% at their bank in the form of fees, even before the latest plans were spelled out as such.

Traditionally one of the main hindrances to the implementation of a Negative Interest Rate Policy (NIRP) has been the availability of cash.  When banks impose a negative interest rate on deposited funds, people tend to move funds out of the bank and into cash.  While many regions of the world have sought to minimize the use and availability of cash, other areas (such as the United States) have continued to allow the use of cash for many transactions.  Even though cash is difficult to use for large transactions (over $10,000) without being reported, cash for smaller transactions is still possible.  Up until now, this has been seen as an obstacle to having a functioning NIRP throughout the banking system worldwide.

How a  $100 Bill Becomes  $98

The clever policymakers at the International Monetary Fund (IMF) have now thought of a way to impose NIRP on cash as well, for those regions where it would be impractical to ban cash.  In addition to their plan to confiscate funds from bank accounts in the form of a negative interest rate payment, they also now plan to impose NIRP on the cash in someone’s wallet, purse, or mattress.   In order to coax or coerce people into spending money to help the economy, a $100 bill would count as a deposit of $98 a year later, if held that long before depositing in the bank.

The big question on everyone’s mind is “why?”.  Why do policymakers insist on pursuing negative interest rates for investors/depositors/cash holders?  In short, because they believe they have to.  Typically, to successfully fight off recession requires interest rate cuts of 3-6%.  But rates have not gotten high enough to drop them by that amount, without going negative.  To spur the economy along and get people to spend money, they believe they have to remove the incentives to save.  When it costs people money to hold or save money, they are less likely to save and more likely to spend.

This plays right into the hands of precious metals investors.  In short, what NIRP is all about is creating inflation.  “Inflation at any costs”, has become the Central Bank mantra.  While most of us prefer deflation (where costs drop), the powers that be prefer inflation (where costs rise).  When deflation hits, it takes less money/labor to buy the same thing.  Lower prices mean lower sales tax revenues for municipalities and states already struggling with revenue issues.  Higher costs mean higher taxes – which means more for them, less for us.  Higher costs is another way to say “inflation”.  Many policymakers have a stated goal to create inflation, and NIRP is designed to do just that.

Gold & Silver – Antidote for Negative Rates

So what is a person to do?  In short – buy stuff, but not just any stuff.  Purchase assets that cannot be confiscated electronically and that tend to increase in value when inflation hits.  Purchase something that gets more expensive to pull out of the ground with every price increase for oil, machinery, and labor.  Purchase something that you can easily store, that will grow over time without ongoing taxation.  Thankfully, we know what that something is.  It is gold, silver, and other precious metals such as platinum.  Palladium is also in this group but is currently more appropriate for speculators comfortable with more risk than the average investor.

We have written recently about central banks and governments loading up on gold, and why that is often a good indicator of what we should be doing as well.  With an increasing focus on NIRP, it is beginning to make more sense.  When low or negative interest rates are imposed on an ever-increasing portion of the world population, the nominal price of gold and silver is expected to rise over time.  Short-term price movements up or down are possible in any investment.  But as we look long term, now appears to be a great time to consider allocating a portion of your funds to gold or silver.