Multiple central banks around the globe are embracing negative interest rates. This is being done in an effort to spur economic growth, encourage spending, stimulate lending and force savers to put their money at risk in the markets. Central banks have been very effective in creating asset price inflation, including in stocks, bonds and real estate, where prices all have skyrocketed.
FOMC Vice Chair Stan Fischer told Bloomberg Surveillance today that he thinks negative interest rates are working in other countries. While this currently seems unthinkable in the U.S., I would not be surprised to hear a rising chorus of support for negative rates in the US should another major market crash materialize.
In fact, Yellen even brought up the possibility late last year, stating:
“Potentially anything – including negative interest rates – would be on the table. But we would have to study carefully how they would work here in the U.S. context.”
Furthermore, the FED required banks to include the possibility of negatively yielding Treasury rates in recent stress tests. Suddenly, zero interest rate policy, or ZIRP, may not be enough. The economy may now need a negative interest rate policy, or NIRP, to keep chugging along.
While the Fed isn’t “planning to do anything in that direction,” the central banks using them “basically think they’re quite successful,” Fischer said Tuesday on Bloomberg Television with Tom Keene in Washington. He reiterated that Fed rate increases will be data dependent without giving a specific timeline.
“We’re in a world where they seem to work,” Fischer said, noting that while negative rates are “difficult to deal with” for savers, they typically “go along with quite decent equity prices.”
“The United States is fortunate that we aren’t in a position where interest rates have to be negative.”
Yes, indeed, how robust is our economy that it can stay afloat with interest rates near zero, but not yet below zero. We can’t raise rates much above zero, but at least we aren’t negative (yet). Such confidence-inspiring words!
When Fischer said that negative rates seem to work, perhaps he meant that they work for central bankers. For retirees, savers and conservative investors, not so much.
Implications for Gold Investors
Gold prices have risen sharply in 2016, following the first rate hike in years that took place in December of 2015. This first rate hike did not cause the gold price to tumble. Those thinking another nudge of 25 basis points will crush the gold bull are mistaken. Yet, they have convinced a good number of people to exit their positions.
Gold and silver prices have corrected over the past month, primarily driven by fears that the FED is going to start raising rates aggressively. But what if the analysts have it wrong and the FED isn’t going to raise rates anytime soon? What if the markets are not strong enough to support higher interest rates? Or what if the FED does hike the benchmark rate and the stock market collapses?
Mike Maloney is quite confident that the liquidity-driven ‘recovery’ created by the world’s central banks is now over. In his estimation, the path ahead is one of accelerating descent into inevitable currency destruction. He is not alone. Some of the world’s top investors view the equity market as vastly overvalued and due for a major correction.
While we can’t rule out another small hike of 25 basis points by year end, I think the FED will have to reverse course at some point in next few years. I believe we are more likely to see negative interest rates than a FED funds rate above 2%. If I am correct, the market is mispricing assets and there are opportunities to profit from this mispricing.
It is my view that misguided fears of rising rates have pushed the USD higher and capped the gold price advance. These fears are unfounded. I believe that gold and silver are headed much higher, even if rates slowly creep higher. But if negative rates are a possibility in the United States, then gold and silver prices are severely undervalued at current levels and set to rocket substantially higher.
We believe the market is currently blessing investors with an excellent opportunity to buy the dip in precious metals and quality mining stocks. You can subscribe to our paid newsletter and get our top gold and silver stock picks here.