The Surge in Fear

Sean Brodrick By Sean Brodrick, Resource Strategist, The Oxford Club

Metals

The surge is back.

And by that I mean the surge into negative-yielding debt. You might call it a surge in fear… and yet another reason the price of gold should rise.

In June, the amount of negative-yielding corporate and sovereign debt in the Bloomberg Barclays Global Aggregate Index of investment-grade bonds hit $11.9 trillion. Then it fell for two months. Then in September, it surged, nearing the peak. For the month, it topped out at $11.6 trillion.

The numbers for October aren’t in yet. But check out this trend.

surge-negative-yields

Remember, if there is a government bond that pays a negative yield over two or five or 10 years, then the government actually makes money by issuing bonds.

Japan has the biggest pile of negative-yielding debt – a whopping $6 trillion. It’s followed by France, Germany and the Netherlands. Western Europe’s debt accounts for 47% of the total.

Here’s the benchmark 10-year interest rates in various countries around the world. U.S. 10-year interest rates are the black line on top.

compare-10-year-rates

As you can see, the U.S. hasn’t tripped into negative yields yet. But the trend is hardly encouraging.

So what does this mean? It means that despite all the strong talk about the economy, investors – including big funds – have no appetite for risk.

Low sovereign bond yields indicate gloomy economic outlooks, expectations of central bank stimulus, and investors running from risk.

The gloomy economic outlook is easy enough to see. The International Monetary Fund just slashed growth forecasts for advanced economies, including the U.S. economy. It singled out the U.S. for especially weak growth, lower than Germany’s, Spain’s and Great Britain’s. It says the U.S. will grow just 1.6% in 2016. Pitiful!

By the way, when the IMF lowered GDP forecasts, it also sounded the alarm on global debt. It said that debt around the world has reached 225% of global GDP.

“Two-thirds, amounting to about $100 trillion, consists of liabilities of the private sector, which can carry great risks when they reach excessive levels,” the IMF added.

global-gross-debt

So yeah, investors have good reason to be worried. And not just about the economy. Other worries include Brexit, the U.S. election, and North Korea and its nukes.

The U.S. has avoided negative yields so far. And if you believe the chatter coming from various Fed governors, the U.S. will raise interest rates sooner rather than later. If you missed it, Richmond Federal Reserve President Jeffrey Lacker said last week that rates might need to rise a lot – and quickly. That probably helped trigger gold’s slump last week.

The Fed’s current target range for the rate is between 0.25% and 0.5%. Lacker said rates should be at 1.5% or higher due to current rates of low joblessness and inflation.

Lacker doesn’t have a vote at the Fed, so I’m in a show-me state of mind when it comes to the Fed and rates.

Especially when estimates of U.S. GDP are doing this…

evolution-atlanta-gdp-forecast

According to a forecast from the Atlanta Fed, expectations for third quarter U.S. GDP have fallen from 3.8% growth in early August to 1.9%.

Because of that information, I think the Fed will stick to a hike of 0.25% in December – or won’t hike rates at all.

I guess we’ll see soon enough. But if the tide goes out and it turns out that the Fed is wearing just a shoddy pair of the emperor’s new swimming trunks – that the Fed has been leading investors on about a rate hike yet again – then we may see investors express their concerns in a more tangible way. In other words, they may buy a lot more gold.

So if you think the U.S. and global economies are on the fast track to easy street, the recent sell-off in gold makes sense. If you think there’s more trouble to come, then the yellow metal is on sale at a big discount. And that means it’s time to shop for bargains.

Good investing,

Sean