Federal Reserve Chairman Janet Yellen in her recent address to Congress mentioned that negative interest rates are on the table.  These comments come after the Federal Reserve, in January, asked US banks to stress test for negative interest rates.  We believe this potential adjustment to interest rates by the Fed, along with moves by other central banks around the world to use negative interest rates, are causing some investors to flee to gold.

On February 15^th, the European Central Bank (“ECB”) voted to scrap the EU500 note, which comprises 30% of the total value of paper money in circulation in Europe.  Now, Lawrence Summers, former deputy Secretary of the Treasury and president of Harvard University, is recommending the US eliminate the $100 bill, which represents 78% of the total value of all US paper money in circulation.  Why are they doing this?  The ECB and Mr. Summers say the purpose is to fight such things as tax evasion, terrorism and financial crime.  However, there potentially is a more clever purpose behind such moves.  A majority of consumers who hold paper money in reserve like to own large bills.  If eliminated, we believe the ECB is trying to motivate them to keep their money in the bank so that they don’t have to carry more money (smaller denominations).  However, with negative interest rates, the consumer who keeps more of their money in the bank will also be losing money on a monthly basis.  We don’t think it is a coincidence that this is occurring on the cusp of the ECB moving to a more negative interest rate policy.

So why is this good for gold?  Most individuals would rather hold something of value than lose money.  In Switzerland today, government bonds with 20-year maturities have negative interest rates and the 30-year bond is yielding a whopping .14%.  That is right – if you buy a 20-year Swiss bond today, you are locking in a loss for twenty years.   So individuals have to decide if they want to lock in a loss of nominal value (not including the loss to inflation), hold hard currency (which the ECB is reducing the ability to do) or buy gold.  Now that the ECB has taken away the highest denomination bill, individuals that were holding these notes as a safety precaution are now switching to owning gold.  Makes us wonder how big of a gold position Lawrence Summers owns!!!

What this means for your portfolio going forward?

This experiment of using negative interest rates is causing dislocation in the financial markets.  The central bankers are trying to force people to put their money in banks that will charge the account holders interest.  This is driving the biggest demand for gold in our lifetime.  Having money in alternatives such as managed futures and gold (miners especially) that will benefit from these central bank decisions is appropriate at this time.