What came as a major shock to markets this week was the Federal Reserve Chair Janet Yellen’s testimony.
Bullion.Directory precious metals guest post 13 February, 2016
By Nick Adamo
President at Bullion Shark LLC
Yellen opened the door for the possibility of negative interest rates in the U.S.
Yes, negative interest rates…
Now besides whether this is actually legal to do, why would Janet Yellen and the Federal Reserve be discussing negative interest rates after they just raised rates by a quarter of a basis point?
Could the recent market sell off, weak economic data, and significant rally in gold and silver over the past few weeks have anything to do with it?
Let’s discuss what effect negative interest rates could have on gold and silver.
Would Gold & Silver Rise in a Negative Interest Rate Environment?
It would seem logical that investors would be more apt to purchase precious metals such as gold and silver in a negative interest rate environment because most other investments carry little to no yield during these market conditions.
This has been the majority view. In other words, low interest rates are better for gold and silver. With this ideology, gold and silver should rise drastically if the Federal Reserve were to make interest rates negative.
However, the United States has never had a negative interest rate environment before, so we would be entering uncharted waters. Contrary to this majority opinion, there are many investors who claim that gold and silver have historically performed well in a rising interest rate environment.
Therefore, if this is true, gold and silver should be expected to decline if the Federal Reserve reverses course and decides to make interest rates negative.
What the future holds will only be discovered with time.
Will retail demand for Gold & Silver Bullion change with Negative Interest Rates?
It is difficult to speculate whether or not negative interest rates would boost retail demand for gold and silver.
However, during the past few years of low interest rates, there has been a tremendous uptick in the amount of silver and gold bullion coins that have been sold by outlets such as the U.S. Mint, Royal Canadian Mint, and others.
If history repeats itself, retail demand for gold and silver should continually increase in this type of market.
Such an increase in demand could ultimately lead to further supply pressures in an already tight market. Additionally, retail investors might be encouraged to shift assets away from money markets and CD investments because their return will probably be less than the rate of inflation.
This could result in more money flowing into gold and silver as an alternative, safe-haven investment.
Negative Interest Rates Could Force Investors to Buy Stocks
Rather than buying gold and silver, investors might be forced to buy into the stock market. Many investors, especially retirees depend on their retirement nest egg to generate them income for daily living needs.
Since gold and silver are not income generating investments by nature, it is logical that many investors who need income will seek out quality, dividend paying stocks instead.
This could lead to the possibility of a rallying stock market, which in turn could be negative for gold and silver prices. Nonetheless, the complete opposite could result. Investors might become even more uneasy, and investor confidence in the stock market could fall to multi-year lows.
Investors may see a negative interest rate environment as a failure by the Federal Reserve and the government to stimulate the economy causing a major sell-off in equity markets. Ultimately, this could result in funds to flow into physical assets instead.
Negative Interest Rates & the Dollar
Negative interest rates could have a negative effect on the dollar’s value as well. Low interest rates, or “cheap money” could put downward pressure on the U.S. dollar.
Since the precious metals and dollar are known to have an inverse relationship to each other, any major decline in the dollar should be beneficial for metal prices. An influx of investment funds away from cash into other tangible investments may occur in such a scenario in order to protect assets against inflation and in an effort to preserve purchasing power.
However, a devaluing dollar could also lead investors to seek exposure in equity markets to attempt to grow their assets at rates higher than inflation.
One thing is for sure. Major decisions that will have a major impact on all markets are about to be made by the Federal Reserve. Silver and gold bullion investors will be on the edge of their seats as the decisions unfold.
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