Despite diminishing returns on its unconventional policy choices, central banks have continued to pursue more and more stimulus and quantitative easing (QE). One after another, the world’s major central banks have implemented these unorthodox policies with little success. The list of nations with subzero bond yields includes the Bank of Japan (BOJ), the European Central Bank (ECB), as well as the central banks of European countries that don’t participate in the eurozone like Denmark, Sweden, and Switzerland.
Never-ending QE, NIRP?
An important question hangs over the head of policymakers now that “Pandora’s Box” of massive central bank asset purchases (QE) and negative interest-rate policy (NIRP) has been opened: Once these easy-money policies are unleashed and markets come to expect such accommodation, is there any way that the authorities can end them without causing a shock to the system—or worse?
As if the unknown side effects and consequences of unprecedented QE policies weren’t enough, these extreme monetary measures haven’t even had their intended consequence of lowering the exchange value of the target country’s currencies. (A weaker currency—in other words, higher inflation—helps boost a country’s export revenue. This strategy is seen as the new prevailing economic model, resulting in “currency wars.”) Primarily, this has been pursued with the euro (EU) and the yen (Japan). Even amid an unprecedented environment of low interest rates, these two currencies have actually appreciated against the dollar by 8.5% and 12%, respectively.
The use of NIRP in Europe has helped lift demand for gold by investors across the continent.
Coin Sales Reveal Safe Haven Demand
Between negative yields on government bonds and the social turmoil of the influx of Syrian refugees into Europe, anxiety among the public is on the rise. With few prospects for positive returns from traditional assets like bonds, Europeans have increasingly turned to alternative investments like gold and silver bullion.
This has largely been the case around the world, with sales of precious metal coins spiking in the U.S. and Australia. For Europe, the main source is the Austrian Mint. Its Gold Philharmonic and Silver Philharmonic coins are the most popular government-issued bullion coins among European investors. Sales numbers for the Gold Philharmonic rose a whopping 45% year-on-year in 2015, with increasing demand forecast by experts in 2016.
In total, gold coin and gold bar sales from Müenze Österreich (Austrian Mint, in German) totaled 1.3 million troy ounces last year. Meanwhile, sales of silver bullion clocked in at 7.3 million oz.
Besides individuals seeking safe haven for their money, institutional investors have also taken note of the ill effects of negative interest rates. David Einhorn, the well-known hedge fund manager and chairman of Greenlight Capital, recently called current monetary policy “counterproductive.”
He believes these measures will continue to drive a positive outlook for gold. Einhorn also cited rising core inflation and falling unemployment as signs that the Fed is likely overshooting its target with its own near-zero rates. He noted that this “increasingly adventurous monetary policy is bullish for 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.