Saturday, 02 April 2016 00:00

Gold Bull Case: Surge In Government Bonds With Negative Yield

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On March 31, 2016, the World Gold Council published a market update - Gold in a world of negative interest rates. The update provides some excellent information on how a significant portion of government bonds are trading with negative yields and presents a case for increasing investments in gold.

The chart below that is sourced from the same report puts things into perspective.

 

Sovereign Debt With Negative Yields At 15 Trillion

 

As of March 21, 2016, 51% of sovereign debt (US$15 trillion) is trading with negative real yields with another 33% trading at yields that are between 0% and 1%.

In my view, both these segments (84% of government bonds) are not worth investing for long-term as they are likely to provide negative returns on investment. I have included the other 33% as well because real inflation for consumers is likely to be higher globally than government published numbers.

The important point here is that government bonds are risk free investments (or perceived to be), but it makes little sense to accept loss making investments. Therefore, when considering exposure to risk free assets, government bonds are likely to be increasingly unpopular and the best alternative is gold.

Over decades, gold has been the only honest currency and is the only store of value. It is therefore not surprising to see the World Gold Council recommending that investors should double their allocation in gold.

In my view, investors in the advanced economy should have at least 20% to 25% of the investment portfolio allocation towards gold with the remaining 75% distributed to equities, cash and investment grade corporate bonds.

While Yellen has ruled out negative interest rates (like Japan and Europe) in the foreseeable future, I see the contagion of negative interest rates coming to the United States at some point of time. In the last speech, Yellen has already indicated that the fed is ready to cut rates back to zero if economic conditions warrant that move.

In conclusion, investors seeking to beat inflation have to increasingly consider investment in risky asset classes and I expect higher investment in gold instead of sovereign bonds in the coming years. This supports my view that gold remains in a bull market and is likely to provide stellar returns in the next decade.

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