These are strange times we are living in. The weight of the global economic crisis and subsequent years of relatively stagnated growth have caused the central banks of the world to pull some untested and unique procedures out of their toolboxes. That has included massive bond buying programs, providing bailout funds and cutting interest rates all the way to zero.
But with many of the measures failing to light a fire under their respective economies, both Europe and Japan have decided to do something even more unprecedented — start charging depositors for the right to hold their money at a bank.
That’s right. The age of negative interest rate policies (NIRP) are upon us. But luckily for investors, gold doesn’t seem to mind the effects of NIRP. In fact, gold prices should thrive in the new era.
Gold Loves NIRP
Back in the 1980s, Japan was going through one of the worst bouts of deflation in modern history, and not once did the Bank of Japan cut interest rates down to negative amounts. Well, that was then and this is now. Japan — along with the European Central Bank, Switzerland, Denmark, Sweden and others in Europe — have all now started to basically charge depositors to park their money at banks with negative interest rate policies.
Things have potentially gotten that bad.
And while NIRP may seem like a far-fetched idea for the United States, the Federal Reserve must at least be considering it. Back in February, the Fed began a series of stress tests at the major banks like JP Morgan Chase & Co (JPM) and Bank of America Corp (BAC). Separately, Federal Reserve chairwomen Janet Yellen in her latest testimony to congress mentioned that the central bank was looking into potentially changing direction on interest rates and would even consider negative ones if needed.
So where does that leave investors? Well, if you’re looking at owning money market funds, CDs and bonds, you’re most likely out of luck. However, for gold investors, this could be exactly the environment you’ve been hoping for.
Gold actually does very well in periods of low and falling interest rate environments. According to research by JPM, it beat stocks, bonds and most commodities in these sorts of periods since 1975. The added NIRP environment only adds a gallon of lighter fluid to the situation. Gold — which is still considered a safe-haven — has a higher yield (0%) than Swiss or Japanese bonds — also considered safe havens.
What’s happening is people are discovering that gold is finally somewhat of a carry function. It’s actually a store of value in the world of NIRP. International gold prices have jumped nearly 18% this year as investors seek a haven from the NIRP policies.
In Japan, gold prices have hit the highest level since July 7 — with nation’s biggest bullion retailer citing the BOJ’s policies as the reason.
Time to Buy
While I’m no goldbug, you’ve got to play the hand that the market deals you. In this case, that means investing in a new era of NIRP. And that means adding some glittering gold.
The easiest and most popular way remains the SPDR Gold Trust ETF (GLD). The GLD exchange-traded fund owns physical gold bullion stored in vault on behalf of its investors. Each share represents 1/10 of an ounce of gold. And it has done a good job of closely tracking the movement of gold since the fund’s inception.
The price divergence comes from the fact that the GLD sells a bit of its holding each year to pay its expenses. Expenses for GLD run 0.4% or $40 per $10,000 invested.
Investors looking to get physical could also consider the iShares Gold Trust (ETF) (IAU) and VanEck Merk Gold Trust (OUNZ).
Another interesting gold bet for investors could be buying gold in other currencies. As Japan and Europe have undertaken their NIRP journeys, both the euro and yen have fallen and the dollar has strengthened. That’s a problem for dollar-denominated vehicles such as the previous mentioned GLD, as the strength of the greenback clips potential returns.
Both the AdvisorShares Gartman Gold/Yen ETF (GYEN) and AdvisorShares Gartman Gold/Euro ETF (GEUR) buy gold in their respective currencies. Since their creation in 2014, both GEUR and GYEN have managed to outperform spot gold prices.
NIRP Is Here to Stay
With growth still not really jump-starting in Europe and Japan, NIRP policies should continue to persist for quite some time. That should continue to put some luster on gold prices. And if the Fed decides to take the plunge, all bets are off.
Investors should add some gold to their portfolios to play the metal’s sustained rise.
As of this writing, Aaron Levitt was long IAU.
