HSBC's chief analyst James Steel states in the latest issue of Gold Investor that negative interest rates are beneficial for gold investments. Juan Carlos Antigas, the leading investment researcher at the World Gold Council, also notes that gold provides stability for pension funds in a negative interest rate environment in the same publication.
The June issue of Gold Investor focuses particularly on negative interest rates from various perspectives. HSBC's chief commodity analyst James Steel asks in the latest issue why gold shines brighter in a world of negative interest rates and finds many reasons for it. The price of gold has risen by about 20 percent since the beginning of the year.
Interest rates have been lowered in the eurozone and Japan, among other places. As investors minimize their risks, they seek safe havens for their assets. Thus, the decline in interest yields supports the long-term rise in gold prices. According to Steel, the drop in interest yields and the slowdown in economic growth may also trigger political responses to the situation, but state financial policies do not affect gold.
Negative interest rates support gold trading.
The purpose of negative interest rates is to accelerate consumption at the expense of saving. One option is to keep assets in cash, but it is significantly more practical for a company, for example, to invest assets in gold, as it is cheaper and easier to store. Steel notes that negative interest rates have also removed barriers to financing gold trading.
Negative interest rates were expected to weaken countries' currencies, but this has not happened, for example, in Japan or Switzerland. Steel estimates that economic policymakers may intervene with more drastic measures in the functioning of the markets, which makes gold an even more attractive investment, as it is not subject to government fiscal policy.
Pension funds should invest in gold
Pension funds should invest in gold.
According to Juan Carlos Antigas, head of investment research at the World Gold Council, gold provides stability during times of negative interest rates. Global pension funds are currently facing pressure from all directions and are suffering from shortfalls almost everywhere. Solutions such as pension cuts and raising the retirement age have been proposed. However, these are not very popular ways among voters to make pension funds sufficient. Another approach has been to increase stocks, low-quality loans, and other high-risk investment targets.
Antigas states that as bond yields weaken, the price of securities cannot rise very much, and achieving economic goals becomes increasingly difficult. The risks of stock portfolios have also increased significantly, according to Antigas. A highly interconnected economy spreads crises from one continent to another in an instant. Antigas points out that gold is worthwhile in these circumstances. During low interest rates, it offers better returns. For this reason, pension funds should also consider increasing their investments in gold, as gold mitigates risks in unpredictable situations.
The European economy is growing slowly
Mervyn King, the former governor of the Bank of England who retired in 2013, states while analyzing the state of the European economy that lowering interest rates cannot help indefinitely, as it does not encourage people to spend their future resources if there is no hope for the future. Although the measures used were good at the onset of the financial crisis, he believes they are now heading in the wrong direction after continuing year after year. He suggests that the global economy has four possible paths out of slow growth and increasingly skeptical voters.
Governments should instill citizens' faith in the future, and productivity should be increased so that consumers dare to spend. According to him, there should also be a shift to more flexible exchange rates to balance imbalances both within economies and between them. Industrialized countries should advocate for freer trade in services as well. International cooperation should also be revitalized, as stimulus measures will not be effective if neighboring countries do not do the same at the same time.
European outlook weak
A slowly growing economy increases the risk of a new crisis. Europe's outlook is poor in that sense, according to King. Austerity policies do not stimulate domestic trade, and there is no democratic support for a common finance minister in the euro area. An economic union is not possible without a political union, and no euro country is ready for that.
According to King, investments should be approached from a practical perspective in uncertain situations. The past does not provide guidance for today, and the most important thing is to assess how to cope with future crises. Gold serves as a good safe-haven investment in uncertain times. Many central banks in Asia and South America have increased their gold reserves in recent years because it ensures independence. Gold also acts as a buffer in high inflation situations.
Texas gold fund and Shanghai's new gold exchange
In an interview with Gold Investor, Shayne McGuire, the portfolio manager for emerging markets who leads the gold fund of a Texas teachers' pension fund, which is among the leading pension funds in the United States, states that the main reason for the pension fund's gold investments has been the benefits that diversification of investments brings. The gold fund was launched in 2009 and increases the fund's long-term risk tolerance.
Gold Investor also writes about the new gold exchange that opened in Shanghai in April, which sets the gold price in China. According to Jia Jinpu, the chairman of the Shanghai Gold Exchange, the new gold exchange will accelerate the internationalization of China's economy and strengthen the country's financial markets.
At the gold exchange, the price of gold is determined by the trading of standardized gold bars weighing one kilogram, and the price is calculated in China's official renminbi currency per gram of gold. During the first month, 105.91 tons of gold were traded, and the turnover of the gold exchange was 27.94 billion renminbi. The gold exchange supports China's gold market, and the price of derivatives is determined based on the trades conducted at the gold exchange.
