time. And believe it or not, this total now includes a significant amount of junk-rated debt as well. According to Bloomberg, some European junk bonds trade at levels where investors have to pay for the privilege of holding them. Yes, you read that correctly... Investors are now paying some of the riskiest companies to take their money. It’s truly a lose-lose proposition. If the company defaults on this debt, investors are likely to lose a significant amount of their investment. But even if everything goes right, they’re guaranteed to lose money on these bonds. Unfortunately, we fear this trend is likely just getting started... The central banks of Europe and Japan appear to have abandoned whatever caution about NIRP they previously had. And now even the Fed is seriously discussing negative interest rates for the first time. In short, despite the current record high amount of negative-yielding debt, the number and size of less-than-zero-return loans could still rise dramatically... which means new highs for gold and silver may not be far behind. If we see real yields on 10-year Treasury securities fall back below zero, gold will surge very quickly... some analysts predict it could hit $2,500 an ounce or more. And what if you’re one of the unfortunate investors paying for the “privilege” of holding junk bonds or deposits with near-zero percent interest? Well, consider yourself warned.
thresholds, a hurricane is coming. When yields on the 10-year U.S. Treasury bond pay at or near zero, you’ll find investors fleeing assets tied to the dollar and seeking safe havens like gold. The yield on the 10-year U.S. Treasury bond is currently just under 2.2% (and falling) while gold is about $1,400 an ounce and on the rise since June. Now, the Fed doesn’t directly control treasury rates, but a new round of rate cuts will almost certainly accelerate this trend. We’re not surprised to see gold surging again. If any of this sounds familiar, it should. In 2016, there was a massive expansion of negative interest rate policy (“NIRP”). The idea of “negative” interest rates is nonsensical. It’s like capitalism turned upside down. Instead of being paid to lend your money to a bank, government, or company, you’re actually paying them for the “privilege.” Negative-yielding debt simply shouldn’t exist in a healthy, free economy. And prior to 2014 or so, it was practically unheard of. But as the central banks of Europe and Japan began to ramp up NIRP in 2015, that all changed. Between late 2015 and mid-2016, the total amount of negative-yielding debt surged more than sixfold... from less than $2 trillion to more than $12 trillion. Late last month, the total amount of this debt broke through $13 trillion for the first Staying afloat...
American Consequences
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