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Gold Firm as Stocks, Oil, Yields, Dollar Drop
by Peter A. Grant
February 09, AM
Gold remains generally well bid, just below the $1200 level, underpinned by persistent safe-haven demand. Further weakness in stocks, oil, yields and the dollar are all contributing to the buoyancy of the yellow metal.
The yield on the Japanese 10-year bond traded as low as -0.007%. That's the first time the 10-year JGB has traded negative . . . ever! Imagine that, you buy a government bond with a decade to maturity and you get less than nothing in return.
As we noted last week, NIRP (negative interest rate policy) may be supplanting ZIRP (zero interest rate policy) as the new normal. And what a disturbing state of affairs that would be!
Negative yields are just not normal. They are reflective of a fundamentally unhealthy system that is dis-incentivizing savings; pushing savers into riskier assets in a quest to generate some yield . . . any yield.
The financial services industry has always cited gold's lack of yield as a detriment. But hey, gold now has a higher yield than a 10-year JGB. And which one do you perceive to be the riskier asset?
The JGB is associated with an economy that his been mired in a secular stagnation for decades:
The JGB is associated with a government running a debt to GDP ratio in excess of 230:1:
The JGB is associated with a central bank that is engaged in a level of quantitative easing that has never been tried before:
The JGB is associated with a country facing a demographic crisis:
Does anyone really thing that -0.007% accurately reflects the risks facing the country of Japan?
The U.S. has been following the same path blazed by the BoJ and Japan. I posted an article yesterday from John Maulden entitled America is turning into Japan, in which he quotes former Fed chair Ben Bernanke saying, "I think negative rates are something the Fed will and probably should consider if the situation arises."
We noted last week that the 2016 bank stress tests run by the Fed include a scenario where the 3-month T-bill rate is negative for nearly 3-years!
"The severely adverse scenario is characterized by a severe global recession, accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities." — Fed Statement on 2016 Stress TestsIf they're testing this scenario, they must view it as plausible. Now is the time to be re-balancing your portfolio in order to weather any impending storm. Do you have enough gold?
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