Making hay from negative interest rates

Friday, 13 September 2019
Adelaide, Australia
By Bernd Struben

  • It’s all coming to a head
  • As for Australia…

Expect the euro to fall, bonds to rally and gold to get an enormous boost from the negative rates in Europe and copycat rate cuts around the world.’

Global strategist, Jim Rickards

It’s not a question of if, but when gold soars to new heights.

Gold analyst, Shae Russell

Well there you have it.

The mainstream hype about dissent among Europe’s central bankers derailing another rate cut from the European Central Bank (ECB) proved to be just that.

Hype.

Yesterday (overnight Aussie time) outgoing ECB chief Mario Draghi put the Eurozone’s benchmark interest rates deeper into negative territory. And for good measure ‘Super Mario’ reopened the bank’s quantitative easing (QE) taps.

If you’ve been following along this week, that shouldn’t come as a surprise. Ignoring the mainstream hoopla, here’s what I wrote on Wednesday, ‘There’s some resistance within the bank itself. But I expect Draghi will get his wish.’

The ECB’s rate has now dropped from -0.4% to a new low of -0.5%. And after an eight month hiatus, the bank is back in the bond buying game to the tune of €20 billion (AU$32.2 billion) per month.

How long will they keep that up?

We have headroom to keep going on for some time at this rhythm,’ according to Draghi. How’s that for specifics?

The ECB is hoping to keep the EU from slipping into recession as it tries to stoke inflation. Never mind that the same negative rate and QE policies have already been in place for years with little to show for it…save ballooning debts and ever poorer savers.

Nonetheless, we’ll likely see the ECB head even deeper into negative territory rather than admit impotence…or incompetence. Christine Lagarde, formerly head of the IMF, takes over the ECB presidency from Draghi next month. And she won’t want the finger of blame pointing her way if and when Europe does enter a recession.

Why does this matter to you as an Australian investor? And how can you make hay from negative interest rates?

We’ll get back to that right after a look at the markets.

But before we do that, did you tune into ‘The 2019 Gold Mania Summit’?

It aired at 2pm AEST today. Paying subscribers of Port Phillip Publishing — like you — were invited to watch for free, courtesy of our good friends at Agora Financial Australia.

The summit features global strategist Jim Rickards and Aussie gold investment expert Shae Russell. They share a range of unique insights on what’s ahead for the gold market that you won’t get from anyone else. That includes an exceptional investment strategy intended to amplify gold’s gains many times over in the months ahead.

And if you’ve been following along this week, you’ll know they expect an epic run higher for the yellow metal.

If you missed the original broadcast, don’t worry. We understand many of our readers have pesky commitments, like jobs and families, that might have prevented them from tuning in this afternoon.

For that reason, publisher James Woodburn is archiving the ‘The 2019 Gold Mania Summit’ until early next week. You can click here to watch it now.

Markets

Overnight, the Dow Jones Industrial Average closed up 45.41 points, or 0.17%.

The S&P 500 closed up 8.64 points, or 0.29%.

In Europe the Euro Stoxx 50 index closed up 22.04 points, or 0.63%. Meanwhile, the FTSE 100 gained 0.09% and Germany’s DAX closed up 51.18 points, or 0.41%.

In Asian markets Japan’s Nikkei 225 is up 219.37 points, or 1.01%. China’s CSI 300 is up 1.08%.

In Australia, the S&P/ASX 200 is up 8.44 points, or 0.13%.

West Texas Intermediate crude oil is US$54.98 per barrel. Brent crude is US$60.23 per barrel.

Turning to gold, the yellow metal is trading for US$1,498.95 (AU$2,184.74) per troy ounce. Silver is US$18.08 (AU$26.35) per troy ounce.

One bitcoin is worth US$10,408.44.

The Aussie dollar is worth 68.61 US cents.

It’s all coming to a head

Getting back to why a world hellbent on negative interest rates matters to you as an Aussie investor, we turn to Jim Rickards:

Interest rates affect exchange rates by drawing capital flows. Exchange rates affect trade wars by making exports more or less attractive to foreign buyers.

Trade wars affect growth by causing the imposition of tariffs to offset the impact of exchange rates. It’s all connected and it’s all coming to a head.’

The first thing Jim mentions here is exchange rates. And indeed, following the ECB’s decision to go further into the negative, the US dollar index is back at more than two year highs.

The second things he mentions is trade wars. A concept we’re all too familiar with now.

Donald Trump has staked a lot of political capital on winning the US trade war with China. And it’s not just China. Trump has many a bone to pick with the EU over their protectionist policies as well. With the 2020 US presidential election less than 14 months away, Trump is upping the pressure on the US Fed to act quickly.

Here’s the tweet he sent while most of us were sleeping in Australia:



chart image
Source: Twitter
Click to enlarge

Getting paid to borrow money is precisely what Trump was advocating on Wednesday, when he took another swipe at the Fed and his favourite whipping boy, Fed Chair Jay Powell.

Here are those tweets:



chart image
Source: Twitter
Click to enlarge

The US won’t be heading into negative territory overnight. But the prospect of negative rates in the States, once unthinkable, is now looking quite possible. If not probable.

Former Fed Chair Janet Yellen doesn’t think the Fed will drop rates below zero. But she does believe the world’s most influential central bank will be doing a good bit more easing.

From Bloomberg:

Former Federal Reserve Chair Janet Yellen said that while the U.S. economy was in a good place, threats to the outlook have increased and the central bank will continue to respond.

Speaking Thursday in Chicago, she said the Fed has begun to address downside risks and “I fully expect they will do more.”

As for Australia…

That’s the US and Europe covered. And we already know the Bank of Japan and People’s Bank of China — among others — are embracing unconventional monetary policies.

But how about here in Australia?

Globally, if all central banks go to zero, then we’d have to consider that as well,’ says Reserve Bank of Australia (RBA) boss Philip Lowe.

From the Australian Financial Review:

“While unlikely at the current juncture, if circumstances were to warrant it, the board would consider unconventional monetary policy options,” the RBA noted on Wednesday in a written response to a question on notice last month from Liberal MP Tim Wilson.

The RBA confirmed the bank had studied unorthodox monetary stimulus experiences of other countries since the 2008 global financial crisis – such as the United States, United Kingdom, Europe and Japan where central banks have bought trillions of dollars of financial assets.

How many trillions of dollars are we talking here?

At last count, the world’s biggest central banks have saddled themselves with an additional US$15 trillion (AU$21.9 trillion) of assets since 2008. Give or take a few dollars.

Not coincidentally, central banks — led by Russia and China — are stocking up on gold.

As we covered earlier this week, the boom in central bank bullion purchases is one factor driving gold’s new bull run. But even more importantly, according to Jim and Shae, are negative interest rates.

Here’s Jim again:

That’s [negative interest rates] the major driver of the gold price. I’ve heard it straight from some top central bankers and it’s going to continue. We’re probably heading to zero in the US, not all at once, it might take a year or so to get there, but that’s just very bullish for gold.

If you’ve already watched this afternoon’s ‘2019 Gold Mania Summit’ you’ll know why Jim is so bullish on gold. And why he’s forecasting gold to hit US$10,000 per ounce within the next few years.

You’ll also know Shae’s investment method for potentially gaining $37 for every $1 rise in the gold price.

As I said up top, Jim and Shae’s exclusive interview with James Woodburn will be archived until early next week.

You can watch that here.

That’s all for this week. Enjoy the weekend!

Cheers,
Bernd