Negative Rates, Gold, And Liquidity Take on a New Role

Negative interest rates make investing in gold more competitive with quality government bonds and liquidity attractive for tactical investments.

Among the many implications that determine the current scenario characterized by negative interest rates for many government bonds (and corporate bonds of highly rated issuers) in the Eurozone, there are two that are of interest to analysts: gold and liquidity. Let’s see together why.

As long as high-quality bond interest rates offered minimal returns, the appeal of gold and cash was limited. Investing in gold was interesting in terms of portfolio risk diversification and for the ‘physical’ value of owning the yellow metal compared to ‘financial paper’ during crises and market turmoil: investors bought gold knowing who could not have counted on coupon flows. But now, adding to this appeal is the fact that government bonds in the euro area (Germans, in particular, but not only) do not pay any interest (exactly as happens with the possession of gold bars or ETFs) while the metal yellow embodies a material intrinsic solid value.

As far as liquidity is concerned, however, with short-term negative interest rates and inflation at its lowest terms (or even in the deflationary area), the maintenance of a large share of monetary instruments (current accounts, deposit accounts, ETFs and euro monetary funds, certificates, and repurchase agreements) does not make the saver give up any interest in the short term and, at the same time, offers the possibility of investing in the opportunities that arise on the markets.

Among those who have recently changed their view on the role of gold in financial portfolios, we note Yves Longchamp, CFA, Head of Research ETHENEA Independent Investors (Schweiz) AG, who was responsible for verifying whether or not the conditions to invest in the precious metal.

“We can say that both the low yields of TIPS (Treasury inflation-protected securities, US Treasury bonds protected from inflation) and the high price of gold are two effects of the same cause” underlines Yves Longchamp who then explains: “If insecurity and fears increase, gold prices will rise and real interest rates (i.e. net of inflation) will fall: low real interest rates, however, are only acceptable for investors to the extent that it is difficult to predict the trend of inflation”.

But for Yves Longchamp, this means, for example, that monetary policy no longer works or that the value of money has become unstable. This would also explain why gold is so expensive.

“Gold is a practical way to transfer assets from one currency regime to another. In fact, unlike real estate and land, gold can be hidden. For investors like us, however, gold performs a protective function in this context” says Yves Longchamp according to whom the yellow metal guarantees optimal portfolio diversification by its low correlation with the evolution of share prices and interest rates of nominal interest.”

“In the past this aspect was not important enough for us since liquidity offered interest. But in this context, in which cash holdings are subject to interest payments, thus equalizing the costs of holding a gold ETF, the ETHENEA portfolio management team has decided to include gold in the Ethna portfolio -AKTIV” concludes Yves Longchamp.

As already in other articles that we have written to give our contribution to the correct management of savings, we wanted once again to share this article published with you to understand once again how fundamental the role of gold is in the proper management of savings and accumulate value without any counterparty risk, which does not happen in any other type of investment.