The world is different now that is was two years ago. It is different than it was ten years ago. In fact, when measured by the global bond markets, the world is in a place it has never seen before. As the sign, look at the amount of investment grade debt that is trading at a discount and the German yield curve. Amazingly, more than a quarter of all investment grade debt is trading at a negative yield. To go along with this, for the first time ever, the entire German yield curve is negative. The picture is almost too unbelievable to believe. The powerhouse of Europe, Germany, has all its debt giving investors a negative return (if the bonds are held to maturity).
What does this imply for money managers and in particular gold? A brief inspection follows.
The Amount of Negative Yielding Investment Grade Is Ballooning
First up is a look at the amount of investment grade debt across the globe. The Bloomberg data suggest that the percentage of all investment grade debt that is trading at a negative yield is over one quarter. This means that money managers, regular investors, and the majority of anyone else investing in investment grade debt would rather lose money (again, if held to maturity) than risk putting money in other, generally riskier, assets.
The German Government’s Yield Curve
Now, look at the yield curve for German government bonds. Astonishingly, the entire yield curve is negative, something the world has never seen before out of Deutschland. Behind this are a German government that limits the amount of debt issued and jitters about the state of the European economy.
Gold’s Implication
What does the implausible shift to low to negative yields mean for the value of gold? Well, it means that investors are more than just a little concerned about many things, including global growth (or lack thereof) and how central bankers may attempt to boost economic growth. Their attempts may well lead to an increase in inflation. This view, what appears to be the majority view, paints an incredibly positive outlook for the price of gold in that gold acts as the undeniable hedge against unwisely induced inflation.
Conclusion
In a shift the world has probably never seen, over a quarter of all investment grade debt across the world is yield a negative return for investors. In this vein, for the first time ever, the entire German yield curve is negative. Investors are nervous, central banks are clueless, formal inflation is surprisingly low, and investors are on an unquenchable thirst for a decent return. All this has led to incredibly non-normal bond markets. Of course, all this is good news for gold investors. With more central bank tinkering on the horizon, the upside to gold as the world’s king of inflation hedging is much stronger than any potential downside.
