Notably, since the ECB’s policy move in 2016, European investors have poured in excess of $26 billion into gold-backed exchange traded funds (ETFs), compared to $13 billion by US investors over the same timeframe.3 Although there are several factors that could be influencing the difference in flows—weaker economic growth, rising geopolitical tensions, Brexit, and/or a depreciating euro—the lower yields have clearly driven the European investor’s appetite for gold amid a growing sea of negative yielding debt.
What if the Fed joins the negative rate party?
In the US specifically, global monetary policy has shifted by 180 degrees this year—changing course from rate increases to rate cuts and ending the balance sheet runoff earlier than expected. Although negative nominal rates are unlikely in the US based on legislative and institutional constraints, even the US Fed is actively entertaining new and creative policy ideas to manage the backdrop of slower growth and fulfill its mandates—like standing repo facilities.
Despite the Fed sitting in better shape than many other central banks to combat a recessionary scenario—having increased its rates nine times from December 2015 to December 2018 and landing rates in the 2.25–2.50% range—a negative real rate strategy is not outside of the realm of possibility should inflation spike, domestic growth slow, or the US dollar face too strong of a headwind. Although a negative nominal rate policy is likely way down on the list of options for the Fed, it is worth noting that during the last five rate cut cycles, the Fed has lowered rates, on average, approximately 3.5%.4 This is a trend that could land the US in negative territory should the Fed decide to follow the playbook of some of the other central banks around the globe.
Squaring up to the current coupon and dividend realities
As global tensions rise and growth slows, it looks as though fewer countries are likely to escape employing some of these newer policies—such as negative interest rates, either nominal or real—even in developed countries, like the US, UK, or Canada. In fact, when looking at real rates that have been adjusted for inflation, investors are facing an even larger pool of negative yields, with upward of $25 trillion of global government debt offering negative yields on an inflation-adjusted basis.