Wednesday, June 15, 2016

Negative interest rates pushing people into gold

My view is that real interest rates are the driver for the gold price long term. Real rates are defined as the nominal interest rate minus the inflation rate. When real rates are negative it is a big positive to owning gold. In fact, the last run up in gold to $1900 per ounce was precipitated by real rates of -3%. We are in similar territory around the world now as central banks deliberately push rates into negative territory.

This forces people holding cash to actually pay banks to hold their cash. That is why we are beginning to see moves by individuals and financial institutions to move their cash out of the banking system.

German insurer buying gold and hoarding cash:


The CEO of one of the world's largest reinsurance companies has launched a scathing attack on the policies of the European Central Bank (ECB) whilst revealing that the firm is diversifying into gold and currencies to tackle the current environment of negative rates.

Munich Re is a leading reinsurance firm - offering insurance for insurance companies. Based in Germany, the company has a 231 billion euro ($261 billion) investment portfolio which contains a 324 million euro investment in physical gold.


Von Bomhard, who is due to step down as CEO next year, took the opportunity on Wednesday to voice his dislike of negative rates alongside the announcement of the firm's more diversified portfolio.
"Sometimes it's lack of understanding or it's pure sheer horror when you look at what they (the ECB) are doing," von Bomhard said, according to a translation of the press conference on the company's website.

German newspaper Der Spiegel reported yesterday that the Bavarian Banking Association has recommended that its member banks start stockpiling PHYSICAL CASH.

Europe, of course, has been battling with negative interest rates for quite some time.

What this means is that commercial banks are being charged interest for holding wholesale deposits at the European Central Bank.


Now it’s the exact opposite. If a bank holds excess reserves on deposit at the ECB to ensure that they have a greater margin of safety, they must now pay 0.3% to the ECB.

That’s what it means to have negative interest rates. And for the bank, this eats into their profits, especially when they have tens of billions in excess reserves.

Individuals are hoarding cash in Japan:


Negative interest rates mean customers effectively pay a fee for parking cash in banks, so Japanese citizens are beginning to hoard yen, according to the Wall Street Journal, and they need somewhere to put it.

Sales of safes have doubled from the same period a year earlier at chain hardware store, Shimachu, according to theJournal. The chain has already sold out of one model worth $700. Others savers are considering more unconventional storage spaces.

I advocate a certain holding of precious metals as insurance against central banks and politicians.

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