By Graham Summers
For decades, the primary argument by Warren Buffett and other financial elites for not owning gold was that “gold doesn’t pay you anything.”
Once the ECB took interest rates to NIRP in 2014, this argument became null and void. In a world in which bonds are charging you to hold them, gold with its ZERO yield has become attractive as an investment.
Yes, we have reached the point at which NOT getting paid is considered an advantage for an investment.
One NIRP cut was bad enough, but the ECB has since engaged in three more. And the Bank of Japan got in on the action too in early 2016.
As a result, today, some $13+ TRILLION in bonds are posting NEGATIVE yields.
Globally the sovereign bond market is roughly $40T in size. This means that 1/3 of global sovereign bonds are posting NEGATIVE yields.
Put another way, Gold is now more attractive than 1/3 of the sovereign bond market from an income perspective.
And now we get to the worse news.
Any reduction in NIRP will only make this situation worse.
If the BoJ or ECB were to raise rates (thereby moving them to closer to positive) this would force bonds to fall and yields to rise.
This would potentially mark the end of the current bond bubble
Investors have been piling into bonds to front-run Central Bank QE programs. This has spun finance on its head with investors now buying bonds for capital gains and stocks for income (dividends no matter how small, are better than being charged to hold bonds).
If Central Banks began tightening, the trend will reserve and all those front-running investors and momentum algos will start dumping bonds.
Looking at the surge in bond yields that began in August, one could potentially argue that the market is already anticipating this. Both the BoJ and the ECB have disappointed in terms of additional stimulus and have begun pushing for fiscal stimulus from Governments (a signal that more easing is not coming from CBs).
IF the market DOES believe this is happening, then bonds will be falling in price, pushing yields higher and Gold will go THROUGH THE ROOF.
A spike in yields signals the inflation genie is out of the bottle. Core CPI has already been above the Fed’s target for 10 months.
Again, NIRP has been a disaster as a monetary policy. And it has set the stage for the next leg up for Gold. Even if Central Banks reverse policy on NIRP and begin tightening, Gold will erupt higher.
We believe the next leg up is about to begin for Gold. Those who remember form the last Gold bull market in the ‘70s, it was the second leg of Gold’s bull market that saw the most gains.
From 1970 to 1974, Gold rose 550%. It then took two-year breather before beginning its second, much larger leg up. During that second leg, it rose over 900% in value.
If Gold were to stage a similar move now, it would rise to over $10,000 per ounce.