In January, the markets were shocked when the Bank of Japan adopted negative interest rates; this followed the European Central Bank (ECB) doing so by more than a year and a half. A growing number of policymakers acknowledge that although below-zero rates may hinder the money-making ability of banks, they are willing to test the theory of negative interest rates. If you’re a gold investor or are planning to become one, it is important to understand what negative interest rates mean for you.
Desperate Times for the Global Economy
Sub-zero interest rates indicate desperate measures — a last resort after all other alternatives have been exhausted. Banks who are stingy with their loans suffer the most in times of negative interest rates. The ECB made its second rate cut in March, with banks being charged 0.4% to hold cash overnight. However, banks that extend a greater volume of loans are offered a premium. Countries with negative rates include not only Japan, but also Switzerland, Sweden, and Denmark. Around the world, many countries are considering turning to negative interest rates in search of profit, despite the potential drawbacks.
Why Negative Interest Rates?
Rates below zero may entice borrowers to seek loans and can reduce overall borrowing costs. While this idea does have its potential advantages, there are serious possible drawbacks to consider. For example, the absorption of negative interest rates by banks may negatively affect their profit margins and make these institutions even less likely to extend loans. In addition, if negative interest rates cause banks to charge customers to hold money, customers may stop using banks altogether and start storing their money at home.
Bad News for Bonds
Negative interest rates spell disaster for bond holders. Because central banks, like the European Central Bank, influence virtually all borrowing rates, sub-zero rates affect a number of fixed-income securities — including bonds. Bond holders who are holding to maturity won’t get all of their investment back, resulting in a loss instead of a profit. Rather than investing in bonds, consider investing in precious metals. Gold, for example, tends to perform well in any economic climate.
Good News for Gold
Investors who opt for gold are more likely to prosper in times of negative interest rates. All of the world’s currencies are fiat currencies, meaning there is nothing of substance to back them. Gold, on the other hand, is a tangible resource that can be used in a variety of ways. Historically, gold has not only maintained its value but actually risen in value. If the dollar were to become worthless, investors in gold would still have something of global value on which to rely.
How to Invest in Gold
Protecting against negative interest rates and inflation is as simple as choosing the right gold investment. Gold tends to hold up well – even in turbulent economic times; in addition, there are multiple ways in which to invest. Options include gold bullion, e-Gold, gold ETFs, and gold IRAs. Investors seeking a diversified portfolio might choose to invest in multiple gold-backed options; silver, platinum, and palladium are additional precious metal choices for investors who want to branch out.