TORONTO – Pension funds and other long-term investors sick of negative bond yields could drive up gold prices within the coming years, said famed investor Don Coxe.
Negative interest rates happen to be adopted by an increasing number of central banks in the past year, using the Bank of Japan becoming the latest in January. The insurance policy tool has been used in order to spur more inflation and growth by making cash hoarding expensive.
Why should someone wish to own a five-year bond with a negative interest rate?
Coxe, chairman of Coxe Advisors LLC in Toronto, told an audience at the 2016 PDAC Convention that it is inevitable that forcing investors to pay to hold bonds can lead to a backlash. Which will eventually drive money into alternative assets, of which gold can be one of the big winners.
“Why must someone want to possess a five-year bond with a negative interest rate?,” he explained. “I believe this is the single biggest new argument about why gold is going to be re-valued.”
Gold investors happen to be suffering through five years of declining prices for the precious metal, which peaked this year at US$1,900 an oz. The price decline has followed a broader bear market for commodities.
Bond prices have posted massive gains in that time. Regardless of the U.S. Federal Reserve moving to hike its benchmark rate of interest in December, the yields of many planet government bonds probed new lows earlier this year (bond yields move inversely to prices).
Yields could go even lower if more central banks go for negative rate policies. In a report last month, Citigroup said that a number of central banks are most likely candidates to consider negative rates in the next few years, with Israel almost guaranteed to go negative later this season.
“A negative yielding bond is not something valuable,” said Coxe. “Pension money is going to search for something [to invest in]; you’re saying gold is riskier than the usual negative yielding bond?”
Coxe said that investors should focus on whether gold can break above the US$1,300 mark to find out whether a longer-term upward move can be sustained. The precious metal is currently hovering at a 13-month high of US$1,270.90 a troy ounce, in line with the April future contract in New York.
Coxe asserted it’ll still take time for investors to return to gold, especially given the poor performance of history couple of years, saying that the market gets used to the precious metal no longer becoming an “obscenity.”
“My feeling is that this only has began to superate through the minds of investors,” he said.
