Golden Gains Amid Negative Yields

08/20/2019 5:00 am EST


Sean Brodrick

Senior Editor, Weiss Ratings

There are a bunch of reasons why gold recently hit a six-year high. But one stands out ahead of the pack — and it's something most Americans don't grasp because it sounds downright crazy, explains Sean Brodrick, contributing editor of Weiss Ratings.

I'm talking about negative interest rates. Negative yields were once considered economic lunacy. Now, they are the new normal. About $15 trillion of government bonds worldwide now trade at negative yields.

That's 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 to even lower rates.

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. $15 trillion dollars in negative-yielding debt is just a signpost to a bigger crisis. This means pullbacks in gold can be bought. Big time! 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 (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.

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