By Gerardo Del Real
It's official, the world is going all-in on what everyone scoffed at just a couple years ago.
Fitch and Zero Hedge recently reported that, for the first time ever, negative-yielding government debt has risen above the $10 trillion mark.
One-third of all global government debt now has a negative yield.
The milestone is pressuring investors seeking yield, such as pension funds, into riskier assets in hopes of delivering any significant return on capital.
I’ve mentioned before that I believe the dollar will one day weaken in a very significant way, and that the weakness will contribute to and accelerate the rise in the price of gold.
But that dollar weakness will not be the catalyst for that rise.
The catalyst will be the outflows from portfolio managers, pension funds, and insurers that will be forced to seek alternative investments.
If one-third of all global government debt is now in negative territory, who owns the positive-yielding debt? The cleanest dirty shirt — the U.S.
According to Citi calculations, the U.S. now accounts for almost 60% of all positive-yielding debt and 89% of the positive-yielding debt which has a tenor less than a year. U.S. debt accounts for 74% of the positive-yielding G10 debt in the one-to-five-year sector.
The result is clear as day to anybody paying attention. If the Fed hikes, U.S. paper becomes more attractive, capital inflows to the U.S. increase, and a higher dollar is the result.
This also means that equities, particularly dividend-paying equities with solid balance sheets, will command a premium. This is one of the reasons that we will continue to see highs in the Dow and the S&P and why I expect pressure in the gold price in the second half of this year.
Pressure that Resource Stock Digest Premium subscribers will be prepared for and will profit from.
While the Fed continues to insist that rate hikes are data-dependent, the Fed also gets to decide what data to pay attention to.
Let me be clear, the Fed does not have much room to raise, yet will have to raise to maintain some credibility.
The Dow, gold, and rates can all rise simultaneously under the right conditions. In the mid-2000s the Fed raised the Federal funds rate from 1% to 5%. During that time, gold went from $400 to $700 an ounce. But we shouldn't expect that.
The market reaction will not be kind, and in the short term it will pressure metals. The buying opportunity will be phenomenal once the knee-jerk trades are done.
In the words of Janus Global Fund manager Bill Gross, “capitalism can’t survive negative interest rates.”
When the Fed is forced to reverse that policy, it will become clear to everybody that the age of central bank control is over, and those of us positioned in the right names will do very, very well.
Lindsey Group's chief market analyst Peter Boockvar explained to CNBC earlier this month that the failure of Bank of Japan Governor Haruhiko Kuroda to achieve stability in its currency, by the adoption of negative interest rates, is the first sign that the influence of central banks is beginning to weaken.
Japan is just the canary in the coal mine. This will become a theme as important as any in the coming years.
"The market acted in contradiction to what he expected," said Boockvar of Kuroda. "This was the beginning of the end of central banks' influence on markets. That's one thing that was a major factor in the gold bear market that began in 2011: an infatuation of faith in central banks, notably the Fed.”
Both the infatuation and the faith are slowly but surely coming to an end as the results fall short of the promises and expectations.
So what to do? Understand that the big money, the portfolio managers, pension funds, and insurers cannot continue to invest exclusively in negative-yielding assets.
Understand that a trickle of the trillions they manage will work its way to the U.S. markets, the dollar, and gold. Not because they’re goldbugs, but because they will have no choice.
Understand that of those three options — the U.S. stock market, the dollar, and gold — gold is the smallest market most susceptible to the largest moves.
Within the gold market, the junior resource market — especially the junior gold companies — has been absolutely decimated, and provides the best risk-reward proposition.
Luckily for those of us who are active in the junior resource space, and specifically the precious metals space, there is a lack of companies doing meaningful work.
The lack of companies doing meaningful work makes it much easier to pick the best names, and is part of why Resource Stock Digest Premium has done so well to date.
Every single one of those companies has potential catalysts in the near term that could take them higher. Some will be bought out at hefty premiums by major gold miners it’s just a matter of when.
Here is a real-time warning underscoring the discord of current policies. The warning comes from the Chief Economist at Deutsche Bank on the ECB.
“The litany of distortions, perversions and disincentives grows by the day. Savers are punished and speculators rewarded. Bad companies survive while good companies are too scared to invest.”
The criticism will get louder in Europe, Japan, and one day here in the U.S. The volatility will be extreme but there are clear ways to profit from it and it’s time to start positioning for those profits.
To your wealth,
Editor, Outsider Club