Global capital is looking for a place to hide. But after decades of enthusiastic
currency creation and financial engineering, there's way too much of it for
any one country to accommodate. This mismatch between money knocking at the
door and available space is leading the handful of remaining safe havens to
put up "no vacancy" signs in order to avoid being swamped. Among the things
they're trying is negative interest rates. That is, if you want to deposit
money in a Swiss or Danish bank or lend money to the Japanese or German governments
you now have to pay them for the privilege.
This sounds a little crazy, and from a historical perspective it is indeed
highly unusual. But it's exactly what you'd expect in a world of ever-increasing
debt and ever-more-exotic financial speculation: Too much bad paper gets created
which eventually blows up, causes instability and leads worried investors to
value return of capital over return on capital. They all pile into whatever
seems most likely to still exist a decade hence, forcing (or enabling) the
managers of those assets to charge rather than pay interest. Here's a sampling
of recent stories on the subject:
Less
Than Zero: When Interest Rates Go Negative
In
Denmark, Depositors to Pay Interest to Bank
Negative
interest rates are hammering Germany's savings banks
Riksbank
Preview: Next in Line for Negative Interest Rates?
Swiss
Impose Negative Rate Echoing 1970s Amid Russia Crisis
Get
Ready For Negative Interest Rates In The US
Now, there are lots of interesting sub-topics to explore in a world of negative
interest rates. But let's start with the role of gold. Traditionally the ultimate
safe haven, it is the one form of money that can't be messed with and therefore
the place to be when the messing gets out of hand.
Lately, for instance, it has spiked in countries with emerging currency crises.
In Russia, Argentina, Greece and in fact the entire eurozone, the local-currency
price of gold has risen faster even than the exchange rate of safe haven currencies
like the US dollar and Swiss franc. And with interest rates going negative
in much of the world, a person with capital to allocate confronts a new and
very interesting risk/return calculus. Consider:
On a cash flow basis, gold sitting in a vault actually costs money in the
form of storage fees. In normal times -- back when government bonds and bank
deposits yielded, say, 6% -- the spread in favor of the bond and against gold
was pretty compelling. But what happens when interest rates go negative, so
that the cash cost of owing gold and government bonds is pretty much the same
at around 1% a year? Now our hypothetical capital allocator has to ask some
new questions. Among them: Has a fiat currency ever had a sustained period
of rising value? That is, has there ever been deflation for more than just
a short while in a system where a central bank could create unlimited amounts
of currency? The answer is no, for an obvious reason: Deflation is bad for
sitting politicians because it makes both government and business debts harder
to manage and therefore elections harder to win.
In such circumstances money printing is pain-free. The sound-money advocates
who normally criticize debt monetization are silenced by falling prices. Inflationists,
meanwhile, love easy money and can always be counted on to cheer low interest
rates and currency devaluation. So when fiat currency deflation becomes a possibility,
it is always and everywhere met with a tidal wave of newly-created money, which
eventually converts deflation into inflation.
This has been happening on a rolling basis around the world. When one country
or currency bloc slows down its central bank opens the monetary spigot, interest
rates plunge and the currency falls against its peers.
So here we are, with gold and government bonds costing about the same to own,
but governments actively trying to lower the value of their bonds and bank
accounts while gold is rising wherever trouble erupts.
The logical conclusion is that if gold and cash both cost the same to own,
then maybe gold -- which has held its value over millennia while every previous
fiat currency has evaporated -- is the better bet. In Switzerland, this is
apparently already happening:
(Bloomberg) -- Investors are buying more gold as an alternative to hold Swiss
franc cash deposits, according Vontobel Holding AG, a Swiss bank and wealth
manager.
"We keep noticing that gold is coming back into favor with investors," Vontobel
Chief Executive Officer Zeno Staub, 45, told reporters Wednesday after the
Zurich-based company announced full-year earnings.
Concerns that Greece may abandon the euro and Ukraine may be headed for
a wider conflict have spurred demand for haven assets. Gold has climbed 4.2
percent this year, even as the dollar strengthened on prospects of higher
U.S. interest rates. Investors' holdings in gold-backed funds are near the
highest since October.
Vontobel boosted the proportion of gold in discretionary managed investments
by 2 percent after the Swiss National Bank increased charges on banks that
use it as a custodian for franc deposits, Staub said. The central bank introduced
a 0.75 percent negative interest rate on some deposits as of Jan. 22.
