Writing in a market update titled: Gold in a world of negative interest rates, the WGC points out that existing negative rate policies are a major part of the metal’s best quarter in two decades, but the longer term distortion effects of the policy could result in greater use of gold within portfolios.
Not only does a negative interest rate policy (NIRP) reduce the opportunity cost of holding gold, the WGC says, it also limits the pool of assets that some investors and managers can invest in, it erodes confidence in fiat currencies and heightens the uncertainty around the efficacy of central bank policy and the depth of their respective tool boxes.
“History shows that, in periods of low rates gold returns are typically more than double their long-term average,” the WGC writes, but, more importantly, the long term effects of negative rates are unknown.
NIRP was largely devised to counteract possible deflation, the WGC argues and, in some cases, currency appreciation. However, it says negative nominal interest rates have short- and long-term consequences.
“Investors (including central bank reserve managers) now need to assess the risk-reward of investing in assets with negative return expectations. But the implications may be more far reaching. Such policies may fundamentally alter what it means to manage portfolio risk and could extend the time needed to meet investment objectives.”
“In the current negative nominal interest-rate environment, about 30% of high quality sovereign debt (more than US$8 trillion) is trading with a negative yield, and almost an additional 40% with yields below 1%. When yields are adjusted for inflation, the figures are even starker: 51% of sovereign debt (US$15 trillion) is trading with negative real yields and only 16% yields more than 1% in real terms,” the WGC writes.
Adding: “Unless investors are willing to accept a loss-making investment strategy, they may need to consider increasing their holdings of gold. We believe this should resonate especially well with pension funds and foreign reserve managers whose investment guidelines are typically stricter and who hold a large portion of bonds in their portfolios. It is also relevant for investors with limited tolerance for risk, as well as those who have increased their stocks holdings due to the low rate environment.”