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Gold, Negative Interest Rates and the Economy

Gold has been steadily gaining so far in 2016 as the global economy weakens. With further weakness expected and negative interest rates now being employed by more central banks, conditions are setting up for gold to continue to move higher

by Jon Salmon, EVR Bullion Limited (UK)

Gold, as we know, has been a very interesting commodity to follow as of late. With global economic conditions, and market conditions proving to be a cause for concern, safe haven investors have been jumping on board with regard to the precious metal. Today, we'll talk about negative interest rates, the recent data that was released that shows that economic conditions aren't quite as positive as we once thought, why they have anything to do with the value of gold and what we can expect to see from gold moving forward. So, let's get right to it.

 

IMF Warns Global Economy is 'Highly Vulnerable'

The International Monetary Fund (IMF) has said the global economy has weakened further and warned it was "highly vulnerable to adverse shocks". It noted that any prospects for growth "could be derailed by market turbulence, the oil price crash and geopolitical conflicts. The agency had already cut its forecast for global economic growth earlier this year and has now said its likely to cut it's global growth forecast in April. If so, it will be it's 17th downgrade out of the last 22 outlooks.

 

Recent Data Showing US Economic Struggles

There are several companies that are charged with surveying economic activity in an attempt to predict what's likely to happen next. One of the most trusted of these companies in the United States is known as Markit Economics. Every month, the company releases what is known as the monthly 'flash services purchasing managers index'. This index gives investors, economists, and analysts a look at what's likely to happen with regard to the sector moving forward. The index is scored on a range from 0 to 100 with 50 being the fine line that's drawn between expansion and contraction. Yesterday, the report was released showing that the monthly flash services purchasing manager's index had fallen to 49.8, showing a contraction for the first time in more than 2 years, and signalling rough economic times to come.

Today [Friday], a revision of Q4 GDP data for the US is expected to show the US economy grew by only 0.3% instead of the previously reported 0.7%, further adding to the stream of weak economic data.

 

Negative Interest Rate Policies [NIRP]

For those that don't know what NIRP is, imagine a bank that pays negative interest rates. Depositors are actually charged to keep their money in an account. It's not yet a reality in America or here in the UK but several of Europe's central banks have cut key interest rates below zero and kept them there for over a year now. It is now a reality in Japan too. As for the bond market, Bloomberg reported $7 trillion worth of government bonds.

What Does This Have To Do With Gold

While from the outside looking in, it may look as though this has absolutely nothing to do with gold. After all, this isn't jewellery or gold coin sales, it's economic data. However, when you think about what causes gold's value to move up or down, it becomes clear. The reality is that like most commodities, the value of gold is heavily dependent on supply and demand. It's also important to remember that gold is a safe haven investment. This means that when the market is declining, investors look to gold as a way to keep their money safe. Now, we get to the economy. When economic conditions are poor, we tend to see declines in the market as a result. So, with the recent data showing that economic conditions are worsening, in the US and globally, we can expect to see further declines in the stock markets, leading to increases in the value of gold.

Add in the reality of negative interest rates being adopted by more and more banks and this suggests risk may continue to widen and further increase demand for Gold. After all, negative interest rates completely removes one concern cited by detractors of physical gold - that it doesn't pay interest. It doesn't lose it either.

 

What We Can Expect To See Moving Forward

Moving forward, I have a positive opinion of what we can expect to see from gold. The truth is that the global market is doing incredibly poorly as of late. With the recent economic data, we can assume that the market declines are likely to continue for quite some time. This combined with the fact that gold reached peak supply, meaning that production is likely to decline, will lead to gains in the value of gold over the long run. All in all, things are looking great for the precious metal.


*This post was published according to the "Contributed Article Terms and Conditions"

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