As I write this, the Federal Reserve is in the midst of its October FOMC meeting. The central bank is widely expected to cut interest rates another 25 basis points. If the Fed follows through, it will be the third cut in three meetings, totaling 75 basis points since July.
Although the Fed continues to call this a “mid-cycle adjustment,” Peter Schiff called the rate cut in July the first one on the road to zero. There’s nothing so far to cast any doubt on that view.
But the Fed is not alone. It joins the majority of the world’s central banks on a race to lower rates and inject more easy money into the world’s economy. As of this month, a total of 54 central banks in both developed and emerging markets have cut their policy/base interest rates.
World Gold Council head of market intelligence Alistar Hewitt points out a number of reasons for this global rate-cutting frenzy.
Ongoing trade tensions between the US China (and elsewhere too), the draining Brexit saga, as well as a myriad of other geopolitical uncertainties, have taken their toll. Global growth is slowing, and investors are downbeat on world economic prospects. Recession in many major economies is now a real possibility.”
The Bank of International Settlements tracks the activities of 37 central banks. Of those, around 60% have cut rates in 2019. That’s the highest level since the global financial crisis with still two months left in the year.
And I have to note that there currently is not a global financial crisis. Like the US, the world is already engaging in what was once considered extraordinary monetary policy. One can’t help but wonder what things will look like when in the wake of the next major crash.
The plunge in global interest rates has led to a pileup of negative-yielding debt. In August, total debt with a negative yield topped $15 trillion for the first time ever. That amount quickly pushed over the $16 trillion mark. Although that amount has fallen in the last six weeks or so, the world is still drowning in around $13 trillion worth of negative-yielding debt with more central bank rate cuts sure to come.
Negative bond yields were once considered to be “economic lunacy.” Now they are economic normalcy.
In other words, when extraordinary monetary policy becomes the norm, everything quickly becomes out of whack.
Central banks, including the Federal Reserve, are desperately trying to keep their bubble economies inflated with another massive injection of money they hope will keep the people borrowing and spending. But this isn’t a sustainable policy. It might have worked in the wake of the 2008 crash, but as Peter Schiff has been saying, it won’t work again.
This isn’t good news for the economy, but it is good news for gold.
As Hewitt explains, artificially low interest rates and the resulting negative yields decrease the opportunity cost of holding gold.
As shown above, interest rates have been lowered and the stock of negative yielding bonds has grown rapidly, lowering the opportunity cost for holding gold. Falling rates and negative returns have made government debt less attractive and haver increased the possibility of higher inflation and currencies depreciation in the future.”
This is a big reason that the price of gold has increased by well over 16% so far this year and ETF gold holdings hit an all-time record high in September.
And there is no reason to believe the race to the bottom in interest rates is going to end any time soon.
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