Gold rally continues as central banks drives rates below zero
Duncan Richardson, News Editor
22 Feb 2016, 3:44 p.m.
Following a four year bear market the gold price is once again in the ascendancy as central banks take drastic action and implement negative interest rates.
With the global economy faltering, there is no way the Fed will continue to raise rates in 2016. It is more likely the Fed will take rates negative in a last ditch attempt to kick start a slowing economy. Unsurprisingly, gold has been the year’s best performing asset. Negative rates mean customers are charged to deposit money with a bank.
Charging customers to deposit money in theory should stimulate the economy by increasing spending and investment. In a world where endless rounds of quantitative easing have failed to reignite the economy, policymakers are running out of ideas and creditability.
Negative rates have already been implemented in Sweden, Denmark, Switzerland and Japan.
Banks will suffer too as lenders earn money on the difference between the interest rates they pay on deposits and the amount they make through investments and lending. As rates fall so does the bank’s profitability.
Central banks are exhausted and as their creditability wanes bankrupt governments may be forced to increase deficit spending to keep the show on the road. The next recession will be worse than 2008 as global debt is so much higher. In the last 7 years global debt has risen by 60 trillion dollars and global derivative exposure is now believed to exceed a quadtrillion dollars.