Gold has been on a tear lately, despite a recent pause in its advance, and the precious commodity could be poised to extend its rally above $1,500 an ounce, on the back of ballooning global debt and monetary policy that has resulted in trillions in negative-yielding securities.
For Trey Reik, senior portfolio manager at Sprott Asset Management USA, current economic conditions bear the hallmarks of a so-called Minsky moment, in which over-leveraged investors are compelled to sell their investments, catalyzing a major market downturn — an ideal environment for gold.
Reik said in a recent research report that “global asset markets may finally have reached the point at which excessive debt levels are overwhelming longstanding relationships in normally functioning capital markets such as interest rates, time preferences and capital formation.”
What if I said I wanted to borrow $100 from you and pay you back $99 five years later? Would you do it?
And yet this is exactly what’s happening right now in the banking systems of Japan, Germany, France, and other European countries.
Negative interest rates — where the lender gets paid back less than they’ve loaned — now add up to 30%, (and counting), of the global tradable bond universe, according to JPMorgan (JPM). You may have seen for instance that Germany just sold the first negative yielding 30-year bond issue.
In case you’re wondering, yes, this is crazy.
“It’s really unusual and really distorting the global financial system,” says Torsten Slok, chief economist at Deutsche Bank Securities (DB). “I spend all my time talking about it.”
Central banks and governments around the world are cornered and the debts they have created can never be repaid. Instead, they will print more money and inflate their debts away.