Is gold the place to hide from negative yields?
Negatively yielding debt is an unusual situation.
It means investors effectively pay interest to the borrower to own the debt rather than the other way around, as you would pay a normal loan.
In a sensible world this makes no sense for any investor; and yet the amount of negatively yielding US dollar debt recently hit a record high at $15.5 trillion, according to the Bloomberg Barclays Global Aggregate universe.
Around the same time the price of gold hit a six-year high of $1,550.
The chart that caught the eye of the Schroders’ Multi-Asset Investment team this month is below. It shows the positive connection between the total value of negatively-yielding debt in US dollars and the gold price (in USD per ounce).
What is happening?
Concerns are rising over the health of the global economy. Growth indicators are deteriorating, trade tensions are escalating and central banks are moving towards an easing bias.
The Federal Reserve recently cut interest rates, for instance. It’s a sign that the US central bank thinks it needs to make money cheaper to borrow to keep people spending to boost the economy.
Markets are also bracing themselves for a potential downturn. The prices of proxies for industrial health, such as copper and oil, have been falling. And investors are flocking towards assets perceived as safe havens such as gold and bonds.
Why is the gold price rising?
Gold tends to retain its value because of its relative scarcity and physical form.
It is a valuable commodity for investors hoping to protect the their wealth during an economic downturn.
Why are debt yields falling?
Likewise, the debt (bonds) of companies and governments that can be relied on to repay the money they borrow are also attractive. They are perceived as less risky as the likelihood of them being unable to repay the loan is low.
The more demand there is for bonds, the more the price of debt rises, which causes bond yields (the percentage of interest payments) to fall. Investors are more willing to accept negative bond yields if it means preserving their wealth compared to potential losses in riskier investments like stocks.
Could gold become the more attractive option?
The demand for safety is causing the amount of negative yielding debt to rise together with the gold price.
Gold on its own looks unappealing for the sensible investor; it pays no yield (interest) after all. The only way to make a return on gold is if its price rises.
But if investors want to be rewarded in yield for buying safe assets like bonds they are fast running out of options, given the fast growth of negative yielding debt. Gold, with zero yield, increasingly looks attractive in this difficult environment for investors looking for safety.
We on the Schroders’ Multi-Asset Investment team are positive on gold given its safe haven characteristics as part of a broader mixed portfolio.
- What will the world look like after Covid-19?
- Can stimulus revive China’s growth story?
- ECB super-sizes asset purchases as deflation fears return
- Monthly markets review - May 2020
- Why equity market neutral strategies could be valuable in a crisis
- Life after LIBOR – Schroders’ plan
The views and opinions contained herein are those of the Authors, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.
Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get back the amount originally invested.
Schroders has expressed its own views in this document and these may change (to be used if the 1st statement above is not being used).
Issued by Schroder Investment Management (Europe) S.A., 5, rue Höhenhof, L-1736 Senningerberg, Luxembourg. Registered No. B 37.799. For your security, communications may be taped or monitored
The forecasts stated in the document are the result of statistical modelling, based on a number of assumptions. Forecasts are subject to a high level of uncertainty regarding future economic and market factors that may affect actual future performance. The forecasts are provided to you for information purposes as at today’s date. Our assumptions may change materially with changes in underlying assumptions that may occur, among other things, as economic and market conditions change. We assume no obligation to provide you with updates or changes to this data as assumptions, economic and market conditions, models or other matters change.