Given an environment of low and even negative yields, slow growth and potential signs of rising inflation, Russ discusses why gold may continue to shine.
by Russ Koesterich, CFA
As my colleague Jean Boivin recently wrote, central banks are pushing the outer limits of monetary policy. This has had many odd side effects, not the least of which is a significant portion of sovereign debt today is trading at a negative yield. If you buy government bonds from Japan today, you’d have to pay interest. Welcome to a world in which investors pay for the privilege of lending money.
Although central banks have been the primary architect of this surreal state of affairs, even if they decide to reverse course, real borrowing costs are likely to remain low relative to the historic norm. Factors such as demographics and tepid economic growth are contributing to the unusually low level of real interest rates (i.e. after inflation).
All told, this is a serious problem for yield starved investors. Ironically, one potential remedy is to take a second look at an asset class that provides no income: gold.