In the economic recesses of my mind, I recall a lecture by a university economics professor about “opportunity cost”. There is a cost to purchasing and owning something that goes beyond the purchase price. The opportunity cost includes what you may have missed out on, by holding one asset over another. For those sitting on the sidelines or holding bonds, the opportunity cost has been great and continues to grow. As we warned our readers about last May, negative interest rates were on the march again around the world. Those who took our advice then and purchased Gold and Silver have seen gains of 22.4% and 25% respectively since the article was published. The “opportunity cost” of owning negative-interest-rate bonds is not only the loss of capital due to the negative rate earned, but also the 22-25% missed out on from not owning Gold or Silver.
It appears this trend is set to continue, in a big way. After what seemed to some to be a reversal in low or negative interest rate policy, the amount of negative-yielding debt is growing again. Sadly, most of this debt is unknowingly owned by Americans, albeit indirectly by their mutual funds and 401(k) accounts. Some of thebiggest names in the money management business, such as Vanguard, are holding negative-yielding debt in the name of their clients. When one of the largest mutual fund and ETF holding investment managers is buying negative yields for their bond portfolio, rest assured so are many others. Many Americans have read about the negative yielding bonds issued across Europe and Japan, but few understand that most are owned here in the USA. Goldman Sachs takes the discussion a step further and sees the possibility of such bonds being issued here as well.
Many Earning Negative Rates at the Bank
Even those Americans that do not own a 401(k) or mutual fund account have been subject to earning negative interest, on funds they have at the bank. As we wrote about back then, many Americans end the year with fewer dollars in their account, because their bank charges them more in fees than they pay them in interest. It has often been shown that earning interest lower than the rate of inflation is a way to lose purchasing power over time, so that $100 may only be worth $98 in next years’ money. But how many Americans realize they may also be losing cash as well, wherein $100 becomes $98 due to fees, and that $98 will only buy $96 worth of stuff a year later? While the cost of this might be $2-4 overtime, the “opportunity cost” of not owning Gold or Silver instead can be $22-24 over the same period.
Wall Street Recommending Gold
So with negative-yielding bonds lurking in many bond funds, and consumers getting walloped by fees that exceed the interest earned at their banks, what other alternatives are there? Increasingly, many are finding refuge in Gold and Silver. Financial analysts are recommending that people add precious metals to their portfolio, both in metals owned directly and in financial instruments backed by metals. The great thing for those of us that own and purchase precious metals, is that future price gains are being supported by the investment community buying Gold to back their financial strategies. Exchange Traded Funds backed by precious metals have moved into the top ten largest
Corona Virus Epidemic - Hastening Recession
With the recent developments in the emerging Corona Virus pandemic, Central Banks the world over are under pressure to increase liquidity and lower interest rates further. The last time there was anything similar (although less severe), China made up less than 5% of the world economy. Today, they comprise 16% of trade and world GDP. With the disease-centered and originating in China, unprecedented steps are being taken to try and slow the spread of this virus. Currently, there are upwards of 56 million people on lockdown in China, throughout many manufacturing regions and major metropolitan areas across the country. As of today (2/4/20) there are 21,000 confirmed cases, with 427 deaths known to be related. But many believe these statistics are too low, with anecdotal information from residents indicating 1500 per day being cremated before receiving a diagnosis in cities that normally see fewer than 150 deaths per day.
Projections of economic growth in China have been reduced from 6% to -1.45% for the current period, which no one is certain when it will end. This is likely to further and speed up possibilities for a world-wide recession, which will affect the economy and markets of every region. China has become a major manufacturing hub for industries the world over. With little business being done, and manufacturing at a standstill, importers in the United States will have less available to sell. While this may eventually help bring back American manufacturing, the interim period looks more uncertain. Even if China opened the factories up today, it is difficult to move people or products when the airlines refuse to fly.
As discussed previously, we alerted our readers last year to the likelihood of recession starting sometime in 2020. The Corona Virus pandemic currently sweeping the globe makes this likely to begin sooner rather than later. With stock markets at all-time highs, bond funds holding negative-yielding debt, and banks charging more in fees than they pay in interest, the “opportunity costs” of not owning Gold and Silver can be much higher than we realize. Precious metals are one of the few asset categories remaining that offer significant upside potential for growth in the current environment. This is bolstered by the fact that current mining operations are taking less Gold and Silver out of the ground, while demand has risen steadily. With the added pressure from money managers on Wall Street recommending allocations to Gold and few other “safe” places to hide, the time is now to get off the fence.
The Cost of Waiting
One of the arguments against holding precious metals has been that they pay no yield. But when compared to bonds or bank accounts paying negative interest rates, zero yield becomes a benefit. When compared to stocks that are poised to decline, the “opportunity cost” of not owning precious metals becomes even more dramatic. There is never a bad time to make a good investment. And for many in today’s environment, sitting still can lead to getting run over by declining assets. Give us a call; we can discuss it today...