¬¬Rates Eye Negative Territory As Capital Prepares For Slow Death

May 8, 2020

Precious metals markets appear to be gearing up for another leg higher. On Thursday, the metals complex rose sharply across the board. Gold gained about 2.5% while silver packed on nearly 4%.

Both of the monetary metals showed signs of breaking out of the sideways trading ranges they’ve been stuck in over the past four weeks. Silver price closed solidly above its 50-day moving average for the first time since late February.

Bulls will be looking for confirmation with strong weekly closes today and then follow-through early next week.

Metals markets – the white metals especially – stand to benefit from gradually improving economic conditions. Although the economy remains largely locked down with tens of millions out of work, dozens of states will be lifting restrictions over the next week, unleashing pent up demand for commodities.

The Federal Reserve will also continue to run the largest monetary easing and asset buying programs in the nation’s history. And Congress may roll out another round of massive fiscal stimulus paid for with money it doesn’t have.

Senator Rand Paul appeared on Fox News earlier this week to offer his take on the situation:

Fox News Anchor: Are we going to see a fourth stimulus, or do you think they're going to wait, and see how the first three are working?

Rand Paul: To people who ask me, I remind them that we have no money. We have no rainy-day account. We have no savings account. The three trillion that we've already passed out is imaginary money. It's being borrowed basically from China, so the irony is we got the virus from China, and now we're going to be more dependent by borrowing more money from China. The only thing that recovers our economy is opening the economy. It's not a lack of money. It's a lack of commerce. If you let people have commerce, if you let them trade, if you take them out from forcible home arrest, our economy will recover, but if you keep everybody under home arrest, and say you cannot practice your business, you cannot sell your goods, there will continue to be economic calamity. And all these blue state governors who don't want to open their state they all are clamoring for federal to bail them out because no state revenue's coming in. We don't have any money.

Of course, the Federal Reserve’s novel policies of unlimited Quantitative Easing render the issue of budget deficits almost irrelevant – at least politically.

Deficit hawks are a dying breed in Washington. The pressures to spend during this time of crisis are overwhelming regardless of party affiliation. And politicians experience virtually no negative direct consequences for spending money they don’t have.

The consequences will be felt over time, though, by all holders of U.S. dollars and dollar-denominated IOUs. They stand to lose purchasing power in real terms and perhaps even in nominal terms as well.

In a year of unprecedented events in financial markets, the next previously unthinkable development for the history books could be U.S. interest rates going negative. On Thursday, futures markets began pricing in a negative U.S. rate environment for the first time ever.

Fed officials including Chairman Jerome Powell have repeatedly said they have no intention of pursuing negative rates, although they have admitted to studying the technical feasibility of adopting a Negative Interest Rate Policy.

But the markets may ultimately force the Fed’s hand. If market expectations increasingly reflect below-zero Treasury bill yields, and across the entire yield curve even negative-yielding longer-term Treasury bonds, then central bankers would effectively be tightening if they refused to let their benchmark funds rate fall below zero.

This is all still speculation at this point, but it’s not wild speculation – not in the least.

When policymakers vow to keep rates near zero as they are now, the inherent risk of such a policy is that the rates are only one tiny move away from going negative. And there is no reason to think the odds are necessarily greater for the next move in rates to up rather than down.

A move to negative rates would give bondholders one last hurrah to experience capital appreciation. But soon thereafter the entire debt market would become a place where capital goes to suffer the slow death of negative returns. It could become a more rapid death in real terms if the Federal Reserve note’s rate of depreciation accelerates.

For now, the U.S. Dollar Index isn’t reflecting much fear of loss versus other fiat currencies. It has traded in a range of around 99 to 101 the past few weeks and remains up overall for the year.

But it is at risk of suffering a major break down in terms of gold. The gold price has already hit new highs versus other major currencies. It is up over 13% this year in U.S. dollars and could potentially make a new all-time USD high before the summer.

That would surely accelerate public interest in precious metals as a viable and necessary hedge against an unlimited Fed.


Silver has 47 protons and 61 neutrons

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