How Negative Interest Rates And ECB Moves Could Shape Gold Throughout The Year

Tuesday, March 8, 2016

One of the biggest stories we've seen in financial markets over the past few months has been monetary policy. After all, central banks around the world make decisions with regard to monetary policy. From there, these banks are effectively causing change in the value of money, which sends ripples through financial markets. Lately, we've heard more and more about negative interest rates. On top of negative interest rates, there has been quite a bit of talks with regard to the monetary policy in Europe. After doing a bit of research on these topics, I found it incredibly interesting how they could shape the value of gold throughout the year. Today, we'll talk about what low interest rates and changes in Europe mean for the value of gold.

Starting With Negative Interest Rates

Interest rates set by central banks are a very interesting topic. The truth is that most of the value in currency comes from the interest rate attached to that currency. The higher the interest rate, the larger the demand from investors. So, when interest rates are high, the values of currencies tend to climb. Knowing this, what happens when an interest rate leaves positive territory and goes into negative territory? To say that a move into negative interest rates devalues a currency would be a very big understatement. The truth is that bringing interest rates into negative territory doesn't just lead to currency devaluation, it makes a currency almost worthless. This is where things get interesting. The truth is that throughout recent times, we've seen 5 central banks push their interest rates into negative territory, led by the European Central Bank.

This is where gold comes in. You see, gold was one of the first ever currencies, and since price changes in the precious metal have nothing to do with interest rates, gold is one of those currencies that will never lose its value entirely. So, as central banks continue to push interest rates into negative territory, consumers, businesses, and investors alike are losing faith in paper money. As this trend continues, chances are that we will see a much higher demand for gold and other precious metals.

The ECB Is Also Likely To Help Push Gold's Price Upward

Another factor in the value of gold is the European Central Bank. Over the past year, we've seen quite a bit of discussion surrounding the topic. Not only did they start the negative interest rate trend we're starting to see around the world, the bank has done several other things to boost its economy. One of the things that it's been doing is printing more and more money in an attempt to effect economic growth in the Eurozone. Unfortunately, this plan is failing miserably. To make matters worse, the ECB can't seem to figure out a better way to improve the economy than reducing rates further and printing more money. So, we're already hearing talks of the ECB picking up the pace of money printing relatively soon. This will only devalue the Euro even further, and that devaluation will likely lead to European consumers and investors looking toward gold as a way to keep some of the value their money has left!

The Bottom Line

The bottom line here is that since the globe left the gold standard, we've seen several economic experiments by central banks. Unfortunately, these experiments seem to be failing miserably. As a result, the values of currencies around the world are sinking into nothing. This is likely to lead to massive increases in demand for precious metals throughout the year, leading to big gains for gold investors as well as investors in other precious metals.

Joshua Rodriguez

Joshua Rodriguez is an avid financial professional. He is the owner and founder of CNA Finance, a partner at Modest Money, and a writer for US News & World Report, Investing.com, and more! Joshua takes a strong fundamental approach to market analysis and enjoys offering his take on what we can expect moving forward. You can reach Joshua at cnafinancehelp@gmail.com.