Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Fed’s NIRP and Its Implications for Gold Investors

Commodities / Gold and Silver 2014 Jul 09, 2014 - 11:52 AM GMT

By: Matt_Machaj

Commodities

Believe it or not, we are finally witnessing a true monetary revolution. Unfortunately it is not the one that gold bugs have long waited for. Quite the opposite. We have the so called “monetary cranks” governing one of the most important central banks in the world. People who set the interest rates not at very low, not even at zero, not even at negative real interest rates, but at negative nominal interest rates. Hold your horses and constrain your joy – this does not concern the interest rate on your loan. It is the interest rate for the deposit facility at the central bank.


Of course it is not something that hasn’t happened previously, or something completely unexpected. Europeans apparently got tired of Americans always leading the way and having the final revolutionary word. Hence the Europeans went forth with a further step and introduced a NIRP policy – negative interest rate policy. Commercial banks, which are supplying the money to the deposit facility, take out less money than they put in. The interest rate is currently at minus 0,1%.

Why do we refer to the so called “monetary cranks” group? Hard money theorists, believers in commodity money (often gold), coined the term “monetary crank”. The epithet was addressed at those monetary theorists who neglected basic functions of money and the interest rate market. They hated gold for various reasons, but the most important one was that it cannot be increased at will, and as a consequence a positive real interest rate is possible. Cranks proposed to destroy this system by the introduction of purely fictitious money which can be increased at will in favor of particular interest groups.

Let us read the official ECB statement:

Since euro area inflation is expected to remain considerably below 2% for a prolonged period, the ECB's Governing Council has judged that it needs to lower interest rates. The ECB has three main interest rates on which it can act: the marginal lending facility for overnight lending to banks, the main refinancing operations and the deposit facility. The main refinancing rate is the rate at which banks can regularly borrow from the ECB while the deposit rate is the rate banks receive for funds parked at the central bank. All three rates have been lowered.

To maintain a functioning money market in which commercial banks lend to each other, these rates cannot be too close to each other. Since the deposit rate was already at 0% and the refinancing rate at 0.25%, a cut in the refinancing rate to 0.15 % meant the deposit rate was lowered to − 0.10 % to maintain this corridor.

It was the main feature during sovereign debt crises that banks diverted from the government debts and decided to keep their funds away from them (the threatened ones). Record sums of euros were put into overnight accounts. ECB wants to avoid that and punish (nominally) those banks which are getting to be interested in this option. Moreover since the main refinancing facility has decreased very close to zero, the Bank is eager to move a bit to a lower rate keeping away from it.

In reality the move appears to be as much desperate as ineffective. Almost like a decision to highly tax strawberries with high hopes to stimulate the market for bananas. Banks’ decisions not to be engaged and launch into new monetary expansion is not something irrational. It is a well thought decision to be cautious and it is partially imputed from the behavior of market participants, who currently treat many assets as untrustworthy.

How does this all relate to the gold market? As you already now at Market Overview we firmly believe in the contrarian investment hypothesis for gold. The price of gold is not something strictly related to absolute debt levels, inflation levels, GDP levels, and so forth. Today it is mainly an investment vehicle alternative to the current fiat system with boosted paper assets. As long as the current system suffers deeply from its internal flaws and contradictions, gold shall be a shiny alternative opportunity to invest the money. Henceforth we can answer the question about the importance of negative interest and the price of gold. No doubt changes by the ECB are not a signal that things are going well; the crisis has not been resolved yet. Negative interest for deposit facility indicates that there is still a lot of garbage in the financial market and there are much reduced investment opportunities than were available in the past. Therefore alternative proposals to secure the capital, including gold, look very attractive indeed. ECB just gave us a signal that it is still the case.

The above is a small excerpt from our latest gold Market Overview report. If you have a free account with us, you can sign up for these reports here.

Thank you.

Matt Machaj, PhD
Sunshine Profits‘ Market Overview Editor
Gold Market Overview at SunshineProfits.com

Disclaimer

All essays, research and information found above represent analyses and opinions of Matt Machaj, PhD and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Matt Machaj, PhD and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Matt Machaj, PhD is not a Registered Securities Advisor. By reading Matt Machaj’s, PhD reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Matt Machaj, PhD, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in