Is NIRP Positive For Gold?

Wednesday, February 3, 2016

goldThe last Bank of Japan’s move is an excellent opportunity to discuss the impact of NIRP on the gold market. How will it affect the global economy and the price of gold?

It’s NIRP Time

The Zero Interest-Rate Policy is over. Now, it’s time for Negative Interest-Rate Policy! Until recently, NIRP could have been considered a European curiosity, since the negative interest rates were set by the Central Bank of Denmark, the European Central Bank, the Swedish Riksbank and the Swiss National Bank. Last week, the Bank of Japan joined the club of central banks implementing negative interest rates. It means that two of the three world’s most systematically important central banks have entered the sub-zero world now. Like every new and unconventional monetary policy, NIRP is an extremely controversial measure. Some people believe that it is an absurd and harmful policy while others consider it as the only hope to fight the deflationary pressure. More and more people favor its introduction by the Fed, so it is worth analyzing this policy.

War on Savings

On the one hand, NIRP is a disastrous idea. ZIRP was an awful policy, but NIRP is far worse. Why? Nominal interest rates are always positive in the free market since people prefer a given end to be achieved sooner rather than later. Therefore, they save or refrain from consumption only because of the promise of interest. Real interest rates may be negative when there is high and unexpected inflation. However, it should not apply to nominal interest rates, since it would mean that people pay money for lending it. Hence, NIRP punishes savers and pushes them to consume more. In other words, the abolition of payment of interest to the owners of capital would result in capital consumption, which would hamper economic growth. Moreover, NIRP would intensify all the negative effects of ZIRP, such as excessive risk-taking, asset bubbles, or the lack of incentives for restructuring and sound fiscal policies. It goes without saying that more financial instability, a slowdown in economic growth and low or negative real interest rates would be fundamentally bullish for the price of gold.

War on Cash

Politicians and central bankers never admit their mistakes. They never consider a failure of their projects as proof that they simply do not work. Instead, they argue that they have to intensify their failed policies. We need more extreme versions of what hasn't worked, they say. ZIRP failed? Oh, maybe, so we have to implement NIRP! But NIRP will also be ineffective because people (commercial banks) can always take their money out of the bank (central bank) and hold cash under the mattress where NIRP can’t reach. Therefore, the only way that central banks can maintain negative interest rates at significant levels for a long time is by abolishing cash. And we see more and more calls for outlawing cash, especially in Scandinavia. Undoubtedly, it would be disastrous for personal freedom, but very positive for the gold market. Gold should be a shiny alternative opportunity to park money in a cashless society.

NIRP Is Act of Desperation

On the other hand, NIRP is merely a symbolic policy. The current levels of negative interest rates are too small to make any difference. In Japan, the account with a negative deposit rate does not even have any balances yet. Moreover, negative interest rates apply only to money parked at the Central Bank (in some sense, the idea of paying for bank services, including account keeping fee, is not very strange). Therefore, the Japanese NIRP may be considered a sign that there are limits to asset purchases. Hence, NIRP is an admission of failure of ZIRP and other unconventional measures and an act of desperation. It is a bullish signal for gold since the price of the yellow metal is negatively correlated with the level of confidence in the major central banks.


The take-home message is that ZIRP is passé. Now, NIRP is gaining popularity. On the one hand, it is a disastrous policy, which will intensify all the negative effects of ZIRP, punish savers and perhaps make politicians and central bankers think about abandoning cash. On the other hand, its real impact has been very small so far and it has more symbolic value as a signal for asset markets of ‘more free money’. In both cases, NIRP is bullish for gold. For example, if the Fed implements NIRP, the price of gold will probably jump as investors would interpret such a move as the act of desperation resulting from the lack of confidence in the U.S. economy.


Arkadiusz Sieroń is the author of Sunshine Profits’ monthly Gold Market Overview report, in which he keeps subscribers up-to-date regarding key fundamental developments affecting the gold market and helps them prepare for the major changes. Arkadiusz is a certified Investment Adviser, a long-time precious metals market enthusiast, and a Ph.D. candidate. He is also a Laureate of the 6th International Vernon Smith Prize.  You can reach Arkadiusz at Sunshine Profits’ contact page.