“Plunging yields, the monetary race to the bottom and fears of competitive, deliberate currency debasement have pushed gold to six-year highs”, we wrote on Saturday morning.
Apparently, nobody cares about the absence of an underlying rate of return on an objectively useless piece of inert metal when you’re getting taxed to park your money in safe haven government bonds and, increasingly, corporate credit. (In Europe, some €865 billion of corporate bonds are now negative-yielding.)
Call it a “chart crime” if you like, but slapping the Bloomberg Barclays negative-yielding debt index atop a simple chart of spot gold produces a compelling visual.
In a world where policy rates are still uncomfortably (in some cases laughably) low, and where central bank balance sheets are bloated, one of the biggest worries is “policy impotence” or “quantitative failure”, as it were.
Indeed, “QF” tops the “top worry” list in BofA’s latest European credit investor survey.
“Investors are fretting that after 700+ rate cuts and more than $10 trillion of asset purchases in the wake of Lehman, central banks’ monetary store cupboard is running bare”, the bank’s Barnaby Martin wrote last week.
What happens in the event central banks are simply unable to squeeze any additional blood from the proverbial stone? What happens if cutting rates further proves to be an exercise in futility at best, and outright injurious at worst?
Well, the knee-jerk reaction from 38% of the bank, insurance, pension fund, hedge fund and asset manager high grade clients who responded to the same BofA European credit survey would be to buy more gold.
“European IG credit investors expect gold to be the asset most sought after upon ‘Quantitative Failure’ followed by US Treasurys”, the bank’s Martin notes.
Asked to choose which asset pricing is most concerning at the moment, more than a quarter of high grade investors pointed to the explosion in the global stock of negative-yielding debt.
(The $12 trillion figure comes from BofAML’s indices as of August 5 – as noted earlier, Bloomberg/ Barclays puts the figure at more than $15 trillion)
Amusingly, six of the choices reflect the same concern (e.g., record low bund yields, etc.). Nobody across the pond was worried about 10-year USTs at 2%, and while the survey was conducted prior the largest five-day plunge in benchmark US yields since the debt ceiling crisis, one imagines the same investors are still unconcerned, relatively speaking, considering German yields dove to 60bps this week.
(Despite the “concern” visualized in the second chart, high yield investors in Europe overwhelming favor duration in a quantitative failure scenario.)
But really, do we need all of this belabored analysis? And if not, must we just resign ourselves to owning the “barbarous relic” in the event monetary policy fails us? Isn’t the “safest” asset for the coming era of competitive easing, rampant currency debasement and, finally, quantitative failure, “obvious”?