Gold investors seem to agree: Don’t fight the Federal Reserve.
With the Fed’s next policy meeting looming this week, hedge funds are exiting from gold. Speculators cut their bets on a bullion rally by the most in more than three months. Holdings in global exchange-traded funds backed by the metal are down from a three-year high in August and heading for the biggest monthly decline this year. Aggregate open interest in New York futures is mired in the longest slump since May.
Speculation is mounting that Fed officials, in a statement scheduled for release on Sept. 21, will signal that higher U.S. interest rates are on the way. That’s bad news for gold, which thrives as an alternative asset.
If you followed Phil’s tips – he sold all gold after making some serious gains since the beginning of 2016.
It is seen as a safe haven in a stormy sea and with the impending US elections there may still be a place for some exposure in a balanced portfolio.
However we are seeing the signs of perhaps a much more fundamental long-lasting storm on the horizon.
It seems the current panacea from governments’ fiscal strategy is that of cutting interest rates further to negative levels;
Negative interest rates: What they are and what they mean?
Typically, a central bank will have a reference or benchmark interest rate, sometimes known as the headline policy rate. It determines the rate at which banks can borrow or deposit cash with the central bank.
A negative interest rate means banks are charged when they deposit money at the central bank as part of their regular banking operations. It’s like a penalty for banks and is designed to encourage them to lend to businesses and consumers, get money moving in the economy, and fuel economic activity.
The same principle applies for investors buying negative-yielding bonds: They, like banks, are paying for the privilege of lending. A bond with a negative yield means that the interest and principal payments the investor collects as the bond matures collectively are less than the price of the bond when it was purchased.
Which central banks have set their rates below zero?
Over the last few years, a number of central banks have moved into this negative territory—the European Central Bank, the Bank of Japan, Sweden’s Riksbank, the Norwegian central bank, and the Swiss National Bank. This is new ground for central banks.
Should investors switch to hold physical cash?
It is true that there is no explicit charge to hold physical cash, i.e., banknotes. And by increasing cash’s share in the portfolio, this undoubtedly serves to dampen volatility. But unlike bonds, it provides no counterbalancing effect in a portfolio when equities fall. Furthermore, investors should not ignore the inconvenience, costs, and risks associated with holding large amounts of banknotes.
In practice, especially because central banks are aware that negative rates cannot be pushed too far, it is difficult to think of realistic circumstances when it will be worthwhile for investors to switch any of their portfolio into banknotes.
What about buying positive-yielding long bonds instead?
Alternatively, investors may want to extend the duration of their bond portfolio by concentrating on positive-yielding long bonds. Of course, this will increase the portfolio’s term risk and expose the portfolio to more downside risk when interest rates rise.
What should investors do?
For most investors it will still be appropriate to carry on holding a diversified portfolio, which includes negative-yielding bonds. The main point here is that investors need to consider any changes in their portfolio in the context of their overall long-term investment objectives.
Phil works with The deVere Group. One advantage of working with him is, as a result of deVere’s $10 Bn under management it has access to world leading multi-asset funds that are not available to retail clients.