15 Trillion Reasons to Buy Gold
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
Last week, my Supercycle Investor subscribers took six rounds of precious metals profits — 63.8%, 31.9%, 19.2%, 17% and 14.9% and 3.5% — and we just locked and loaded with more picks to ride the gold wave higher. Potentially MUCH higher.
And you’ll want to get in now, because this megatrend is only picking up steam. (Click here to see how.)
In fact, gold blasted higher this week to a six-year high. There are a bunch of reasons why. But one stands out ahead of the pack.
And it’s something most Americans don’t grasp because it sounds downright crazy.
I’m talking about negative interest rates. Negative yields were once considered economic lunacy. Now, they are the new normal.
How does this affect gold? I’ll get to that.
The Race to Hell
One of the biggest gripes bears make about gold is that it doesn’t pay interest. Well, neither do a lot of bonds lately.
About $15 trillion of government bonds worldwide now trade at negative yields. That’s according to the latest Bloomberg data. That’s also 25% of the global government bond market.
The amount of negative-yielding debt has tripled since October. In less than a year!
How is that possible? Well, central banks around the world engage in unprecedented monetary easing, which forces rates lower and lower. Now, 12 countries around the world — including heavyweights like Japan, Switzerland, France and Germany — have 10-year-bonds with negative yields.
The central banks blame all the bugbears they see threatening economic growth: The U.S.-China trade war, geopolitical concerns and more.
But the truth is that the world’s markets are now addicted to negative rates. It’s the crack cocaine of capital. The high-speed chicken feed of high finance.
It’s getting worse. In Germany, the 30-year government bond went negative for the first time ever last week. Governments are cutting interest rates competitively, trying to undercut each other and give their own economies an advantage.
It’s a race. A race to hell!
These are bonds with nominal yields (coupon rates) below zero. Some pay just above zero. And a lot pay less than inflation. The amount of debt with negative real yields — that is, that pay yields below the rate of inflation — is about $30.2 trillion!
On the chart, RNY is real negative yields. NY is negative yields (or nominal negative yields; that is, debt that actually pushed out the door with a negative rate).
So, who’s buying such debt?
Buy or Die
A conversation I had with a fund manager in Europe was quite revealing …
This fellow — let’s call him Franz — told me that as European governments rolled out negative-yielding debt, Franz’s fund stopped buying bonds. He preferred to keep more cash on the books rather than buy a bond that would cost him to own it over the next 10, 20 or even 30 years.
That’s when the regulators called. “Why aren’t you buying bonds?” they asked.
“There’s no yield in new bonds,” he replied.
“Part of the mandate of your fund is to own government bonds,” the regulators told him. “Either buy the bonds, or we’ll shut you down.”
So that’s who is buying these bonds. Funds that are forced to buy them … OR ELSE.
So, what does this have to do with the price of gold?
As I said, one of the complaints about gold is that it doesn’t pay interest. Well, if bonds don’t pay interest, gold starts to look much more attractive.
Just look at this chart I made on my Bloomberg terminal. It compares the rise in negative-yielding debt with the rise in gold prices.
The white line is total negative-yielding debt, and the yellow line is the price of gold. You can see that gold is tracking the amount of negative-yielding debt very closely.
Now, here’s a question for you: Do you think that, going forward, the governments of the world will issue MORE or LESS negative-yielding debt?
When you know your answer to that question, you’ll know where you think gold prices are going.
I believe that interest rates are going down, not up, in the foreseeable future. And that means gold is on the launchpad.
Gold’s fast and furious breakout is changing the game.
My previous target on gold was $1,609, but the yellow metal just gave me a new target. Now, it is $1,789.
That is a heck of a move. And you can make the most of it.
How You Can Play It
15 TRILLION dollars in negative-yielding debt is just a signpost to a bigger crisis. This means pullbacks in gold can be bought. Bigtime! And as bullish as gold looks, gold miners look even better.
That’s because the miners are leveraged to the underlying metal. Select miners could easily double, triple or quadruple the move in gold itself.
You can do the hard work of researching individual stocks. Or you can just buy the VanEck Vectors Gold Miners ETF (NYSE: GDX).
It’s a basket of leading gold miners. And, like gold and individual miners, the GDX is on the launch pad. And it’s got 15 trillion reasons to power higher.
All the best