Central bankers attempts to smooth over a bumpy economic recovery has taken a new turn following the auction of long term bonds by Portugal, Spain, France and Belgium issuing debt securities with maturities of between 30-50 years in a bid to take advantage of the negative interest rate environment currently being meted out worldwide by many developed world economies.
A staggering $9 Trillion worth of bonds worldwide presently sits at yields below zero, a first for many in the financial industry in an experimental usage of negative interest rates in the hope that it would bring some life back to economies that are suffering from deflation and low economic growth.
Yet experts have warned central bankers that the flaws of implementing such extreme policy could have a dire effect on the outlook of the world economy for decades if the incorrect approach is not taken from government's in restructuring their economies after being afforded ample amount of time to do so, instead choosing to feed the social welfare addiction of its voters to continue flaming their own political greed.
Hindsight would suggest that extending the maturity of long term bonds adds an element of risk when purchasing these bonds which pushes the yield threshold above zero and into positive territory, a once fixed convention that never flirted with any hints of diverging to the pathway we've found ourselves on. The demand for these securities has attracted a substantial amount of attention from analyst who seemingly label this as investors last ditch effort to get their hands on favourably yields.
It's also indicative of the bond markets expectations that central bankers will continue to loosen their grip on monetary policy going forward with no signs of differing views from decision makers. When will the realisation sink in that the fantasy the world has been living in for the past eight years is slowly waking the dreamer by invoking the most terrible of nightmares?
We've heard controversy stir up when protestation was aimed at the ECB for taking the decision to scrap the
€500 note, saying it made money laundering easier for criminals. Many haven't bought into this excuse with some saying the central bank wants to eliminate the use of physical cash so it can have greater control over the money flowing in and out of bank accounts, eventually forcing people to allocate their savings into assets or inadvertently spend it.
We also saw the Bank of Japan reporting that the demand for the highest denomination note
¥10 000 has surged by 6.9% year on year after the introductions of negative interest rates.
This points to the Japanese public opting to hold their savings in physical cash rather than be penalised for keeping it in the bank where it should supposedly be earning interest! Besides this fact, it would furnish an opportunity for a far lesser burdensome method of storing wealth to be utilized. That particular method which has stood the test of time is Gold...
A possible reason why we've seen the resurgence in the yellow metal is because investors feel that central bankers, being the last true saviours of the world economy, have depleted their ability to control the outcome and are scraping the bottom of the barrel for bamboozling solutions. As time bides the inevitable, the risks grow larger everyday with each passing day bringing forth new evidence of the extent of the contagion.
Making things easier and safer for investors to buy gold than was the case only a few years ago is the creation of exchange traded funds which actively buys and sells gold, storing it in vaults for safekeeping which represented most of the weight in demand. Delving further into the matter, one wouldn't be naive to miss the fact that demand from India and China, the largest consumers of Gold in the world, has shrunken due to a strike by jewelers in the former nation and a slowdown in the economy with the latter.
Yet the demand for Gold has still increased with the price registering a gain of 16% this quarter, the second highest on record since 2000. Moves on a scale like this don't blow into the market by chance, they form when there's a sentiment change which is exactly what's happening right now. The tornado may be blowing in but the storm chasers aren't riding until they can get close enough, a thought to ponder over when you consider how close we really are to the edge.
