If there’s any one axiom about monetary policy that has held true lately, it’s that volatility and uncertainty are the only constant. You can throw everything else out the window.
First, the Federal Reserve was on track for tightening policy; now the Fed is rapidly backtracking from that position. The Fed’s international counterparts were already moving the opposite direction by loosening policy. Now, with little in the way of positive results from these extreme policies, those central banks have (naturally) doubled down on the failed strategy. The respective monetary authorities of Japan, the European Union, and China have all committed to even more stimulus.
The solution for these misguided policies—variously called quantitiative easing, monetary stimulus, or “Abenomoics” depending on where you are—is simply more of the bad policy, right? This is the approach being taken by the European Central Bank (ECB), the People’s Bank of China (PBOC), and the Bank of Japan (BOJ).
Slump for Treasurys
Meanwhile, the Fed is sweating bullets over the uneasiness of the Treasury market, which is spreading to the world’s credit markets in general by default. T-notes are their shorter cousins T-bills are typically seen as among the safest of all assets. This idea has deeply come into question by the excessively high levels of demand for “risk-free” assets to protect investments from the current economic disorder. Benchmark 10-year Treasury yields remain below 1.75%, indicating considerable overcrowding into government bonds.
The result has been improved appeal of gold relative to other safe havens. As extremely low interest rates and even the specter of negative rates have made Treasurys less and less attractive, investors have naturally turned to gold instead. This situation means that the opportunity cost of holding gold (instead of something that provides a yield) is not an issue at the moment, while Treasurys (and government bonds around the world) offer hardly anything above holding cash. The comparisons between gold and Treasurys continues to shine brightly on the yellow metal.
The crumbling sentiment in the Treasury market only exacerbates the Fed’s problems. A healthy and functioning credit market is one of the key signs the central bank supposedly uses as a leading factor in its decisions. Other measures such as inflation, gross domestic product (GDP), demand for housing, and the price of energy are all equally unfavorable by most measures.
Right now, the numbers are not good. This is difficult for even the best spinsters to sell to the public and other Fed watchers. Yet, this is exactly how the Fed has painted itself into a corner: Fed Chair Janet Yellen has repeatedly stuck to the line that the central bank will be “data-dependent” in its evaluation of the economy. It’s a convenient cover for any of its actions to be explained away, but it also gives critics something to seize upon.
Considering there’s a 90% chance (according to futures markets) that the Federal Reserve doesn’t raise interest rates at its March meeting, the odds are that the bank will reveal itself not to be truly data-dependent, and may very well explore negative interest rates.
With the potential for negative interest rates looming, any reasonable investor must wonder where to find safety from the punishment imposed by this unorthodox policy. You’ll find the top answer is almost unanimous: gold.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.