Negative yield on bonds globally likely to push gold prices even further

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For the first time in history, the US 30-year Treasury yield fell below 2% and 30-year Germany Bund is offering negative yields. That means investors holding bonds for 30 years will get an amount less than what they had invested. The world is talking about an inverted yield curve, a precursor to global recession. Inverted yield curve was seen between 3-month US Treasury yield and 2-year Treasury Yield. The news resulted in gold prices cross $1525 an ounce.

The price of gold jumped above $1500 an ounce when total value of negative yielding debt touched $15 trillion. Out of approximately $30 trillion bond debt, $16 trillion are yielding negative return. Gold is trading at all-time high in over 20 currencies like Indian Rupee, British Pound, Canadian Dollar, Australian Dollar, Russian Ruble, South African Rand, to name a few.

Fact is, the Reserve Bank of India along with central banks of New Zealand and Thailand surprised markets by cutting rates more than expected. Most central banks appear to be in favour of rate cuts. The ECB has hinted of possible further rate cuts and unleashing monetary easing policy. Swiss Banks’ interest rate is at a negative 70 basis point and ECB’s deposit rate is at the negative 40 basis point.

So money will flow either into equity market, bond market or into gold. ECB is on verge of recession so the equity market there is not going to perform. Bond market is yielding negative returns. Gold is the best option right now, since bonds have shown negative yields. The next trigger for gold prices on the upside is expected to be a rate cut from US Fed this month.

If the US-China trade war escalates it would push the world into recession. World currencies will fall and money flows will divert into gold. Global central banks like that of Russia and China are adding gold to their reserve. Total gold holding of China stands at 62.26 million ounces. Russia has been adding to its gold reserves for the past two years.

If growth worries persist due to trade war, gold would go even higher driven by large ETF gold holdings. Add to this the current woes of the equity market, the sorry state of real estate and negative yield bonds, and you can really bet your money on gold.

Shekhar Ghosh is consulting editor, Indoasiancommodities.com. He has edited and written for publications like Business India, Business Standard, Business Today, Outlook and many other international publications. He can be reached at shekhar.ghosh@indoasiancommodities.in.

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