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How negative Interest rates can be good for gold prices


How negative Interest rates can be good for gold prices

Today is Thursday 7th April 2016 and we are briefly looking at the impact of negative interest rates on the price of gold.

The expectations of interest rate hikes by the Federal Reserve was one of the greatest factors weighing on gold prices in 2015. An increase in interest rates diminishes the appeal of gold, which doesn’t pay any dividends or interest. So, a lower-than-expected interest rate would be positive for gold prices.

Similar dovish comments in March and then again yesterday further supports this view. So despite quite positive job figures, the Federal Reserve is indicating that there are only likely to be two interest rate rises this year as opposed to the originally planned four.

Even the World Gold Council highlights four reasons why negative interest rates will structurally increase demand for gold as a portfolio asset:

1. Reduces the opportunity cost of holding gold.
2. Limits the pool of assets some investors/managers would
invest in.
3. Erodes confidence in fiat currencies due to the threat of
currency wars and monetary intervention.
4. Further increases uncertainty and market volatility as central
banks run out of effective policy options to combat
inflation/deflation and/or spur growth.

So does this mean that gold prices will inevitably rise and soon? Not necessarily. Should global economic activity increase and world economies pick up, then we shall undoubtedly see further stock market increases and a move away from gold, though silver may actually benefit from that scenario. More likely, we suspect that such improvements, if they do occur, will be slow and small.

The One aspect we believe is pretty well determined, and that is, even if we see higher US interest rates, it does not change the outlook for very low and negative global interest rates elsewhere.

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