Negative yield on bonds globally pushing up gold prices to new highs

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Published: September 3, 2019 7:06:12 AM

If growth worries persist due to trade war, gold prices would go even higher driven by large ETF gold holdings

Gold prices, US china trade tension, global trade, Jerome Powell, Spot gold, US gold futures, US Federal ReserveECB has hinted of possible further rate cuts and unleashing monetary easing policy.

The price of gold jumped above $1500 when total value of negative yielding debt touched $15 trillion. Out of approximately $30 trillion bond debt, $16 trillion are yielding negative return. Gold is trading at all-time high in over 20 currencies like Indian Rupee, British Pound, Canadian Dollar, Australian Dollar, Russian Ruble, South African Rand, etc.

Negative yield on global bonds
Last week, 10-year US Treasury nominal yield fell below 2% and below 0% on an inflation adjusted basis though it bounced back. But this is a warning sign. First time in history, the US 30-year Treasury yield fell below 2% and 30-year Germany Bund is also for the first time offering negative yields.

That means investors holding bonds for 30 years will get an amount less than what they had invested. Last week, headlines around the world talked about an inverted yield curve. Generally, inverted yield curve is precursor to recession although it takes around 12 to 18 months for recession to come. Inverted yield curve was seen between 3-month US Treasury yield and 2-year Treasury Yield. The news brought gold prices to above $1525 but then it failed to sustain above that level. We believe gold is taking a breather and the next trigger for gold prices on the upside will be a rate cut from US Fed this September.

Rate cut by central banks
Reserve Bank of India along with central banks of New Zealand and Thailand surprised markets by cutting rates more than expected. Worldwide, all central banks are sounding dovish. The ECB has hinted of possible further rate cuts and unleashing monetary easing policy. Swiss Banks’ interest rate is at a negative 70 basis point and ECB’s deposit rate is at the negative 40 basis point.

So money will flow either into equity market, bond market or into gold. The condition of the European economy is well known. ECB is on verge of recession so the equity market there is not going to perform. Bond market is yielding negative returns so where will investors park their money? Naturally, gold is a good alternative and that is why gold prices have started shining since bonds have started giving negative yields. The opportunity cost of holding gold is also down as bonds are giving negative yield return.

Gold glitters
If growth worries persist due to trade war, gold would go even higher driven
by large ETF gold holdings. Portfolio managers continue to under-own gold so they will allocate more gold to ETF.

Gold
ETF attracted nearly $2.6 billion inflows in July due to weak global growth and global yields crashing.
The holdings in July are around 2600 tonnes, a level unseen since March 2013. If trade war escalates it would push the world into recession. World currencies will fall and money flows will divert into gold. Global central banks like that of Russia and China are adding gold to their reserve. Total gold holding of China stands at 62.26 million ounces. Russia has been adding to its gold reserves for the past two years.

Investors are likely to prefer gold to US dollar as long as global safety concerns are paramount. US dollar is stronger as other currencies are getting weaker but investors may get better return in gold rather than holding US dollar. At present, the equity market is not showing rosy picture, real estate is struggling and bonds are yielding negative return. So where does that leaves investors to park their money?- Gold, ofcourse.

(The writer is director, Tradebulls Securities)

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