Investors are losing faith in tired monetary policies and flocking to safe havens, old and new.
Thus far 2016 has seen declining U.S. bond yields. Declining may be an understatement: In June yields sunk to levels unseen since December 2012, dropping from 2.288% to 1.52% or -33.6%. And the current and growing trend of negative interest rates, adopted by the Bank of Japan and the European Central Bank, mean that nearly 40 percent of sovereign debt is trading with negative yields.
Meanwhile, stocks prices remain modest. This week the Dow dropped 2.95 points to 18,352. The S&P went the other direction, but only by .46 points to 2,164. For the year they are up 5 percent and 5.6 percent respectively. The dollar is down, dropping from 101 to 97 on the U.S. Dollar Index, a fall of -4 percent. Some analysts are predicting an even steeper fall by next year.
No wonder precious metals are increasingly hot commodities. Gold is up 29 percent so far this year, to $1,360, a 28-month high. And silver is currently sitting at $20.63, up from $13.85 – an astonishing increase of 49 percent for the year.
Then there is Bitcoin. The value of the worldwide digital payment system soared 34 percent from $430 to $576 despite a dip last month after the hack of the online trading spot Bitfinex.
The disparity between cash, stocks and bonds versus precious medals and crypto currency is easy to understand. At times of an uncertain and unstable market, investors are flocking to relatively safer havens as a way to hedge risk. Factor in the U.S. G.D.P.’s disappointing second quarter growth of 1.2 percent, seemingly postponing any long-term interest rate hike, and gold, silver and Bitcoin are increasingly attractive.
This is a demonstration of the inverse relationship between dollar denominated and alternative assets. When one goes up, the other goes down. That first group of assets is sluggish because a host of government policies intended to grow world economies have simply not worked well. These include the aforementioned negative interest rates, raising taxes, and increasing national debt and deficits in order to finance a seemingly never-ending string of stimulus spending.
The truth, which investors can plainly see, is that these failed monetary and fiscal policies are not about to be traded in for a set of free market solutions any time soon. And even as governments are hey are also unlikely to produce better results in the months ahead. And that’s why investors are flocking to sanctuaries that have value independent of government.
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