Why Negative Interest Rates Speak for Gold and Bitcoin

The eroding trust into our fiat currency system and into the ability of central banks to manage the economy calls for assets that are truly uncorrelated to bonds, equities and real estate. 

Myret Zaki

Deutsche Version

Over the past 12 months, Bitcoin gained 30% in Dollar terms, while gold was up 25%. Maybe it had something to do with the realization that we are, for good, in a perpetual zero rate regime.

Myret Zaki

Myret Zaki started in 1997 as a junior analyst in a Geneva private bank where she learnt the basics of equity research, before joining the daily newspaper «Le Temps» in 2001, where she was in charge of the finance section for 9 years. When the financial crisis broke in 2008, she wrote the investigative book «UBS, am Rande des Abgrunds» (originally published in French as «UBS, les dessous d'un scandale»), for which she received the Schweizer Journalist prize. She joined «Bilan» magazine in 2010 where she became Chief Editor from 2014 to 2019. Between 2010 and 2016, she wrote three other bestselling books, about Swiss banking secrecy, the end of the Dollar reserve status, and the rise of the shadow banking system. She has a Political Science Bachelor from the American University in Cairo and an MBA from the Business School of Lausanne. She is now a freelance columnist and a consultant in influencer and opinion leader strategies.
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Short term interest rates in the United States have remained at 1% or lower for a decade, and after less than two years at (still very low) levels between 2% and 2,5%, they are heading toward zero again. Hardly anyone remembers that the historical average for the Fed funds rate used to stand at 3,5%, as that would look sky-high by today's standards.

Meanwhile, negative rates in Europe and Switzerland are also here to stay.

This situation speaks for alternative assets; true alternatives, offering real non-correlation. Real estate, whose prices are correlated to low rates, is not much of an alternative anymore as prices in Switzerland are very elevated by historical standards.

Institutional investors have been shifting their allocation away from negative yielding Swiss bonds into real estate – with the effect that property has limited upside potential in the medium term.

For ordinary investors, buying property is also not that rewarding, even with rock-bottom mortgage rates. Mortgage lending is tightly regulated in Switzerland: Your pension money can no longer represent more than half of your equity funding, and you have to prove to your bank that you could afford an interest rate of 5% in order to obtain a mortgage at 1% rates. Plus, your mortgage payments shall not exceed one third of your income.

That leaves out many lower-income first-time buyers, who are stuck being tenants. Their rents take several months to decrease in line with lower interest rates, and adjustments are usually not automatic but on request.

The search for real diversification

In short, low or negative interest rates are of no obvious help when it comes to the purchasing power of lower middle classes, nor are they succeeding in keeping the Swiss franc weak for exporters. All of which transpires in the subdued growth of Switzerland's GDP, revised down by the State Secretariat for Economic Affairs for 2019, from 1,2% to 0,8%.

In this environment, real diversification is of essence, and asset classes like cryptocurrencies and gold, which would once seem so marginal in a portfolio, look like interesting alternatives. Both cannot be created in unlimited amounts by central banks, both are decentralized, relatively uncorrelated to equity markets and both can't be subjected to negative rates by central banks.

Gold is less volatile than cryptos. In 2017, Bitcoin was about 15 times more volatile than gold, according to a recent report. Gold is also more liquid than cryptocurrencies. Every day, roughly 2,5 billion Dollars in Bitcoins are exchanged on average, which only represents 1% of the gold market, whose daily volume exceeds 250 billion Dollars.

In times of crisis, gold doesn't depend on a network. If you have to settle a transaction quickly, you can do it instantly with a gold coin: no need for electricity, technology, or a connection.

Gold and Bitcoin are another name for mistrust

But Bitcoin has much going for it, too. It has the preference of younger generations, which are not as keen to hold gold as their predecessors. Quite a few sophisticated investors also subscribe to the doctrine (defended by central banks) that gold is but a «barbarian relic», and question its intrinsic value.

To young investors, Bitcoin is digital gold, with a payment option. Their interest in cryptocurrencies is their own way to express some form of distrust in the future of the fiat currency system. Digital natives don't find it foolish to allocate part of their savings to Bitcoin, in case they had to witness a major financial disruption.

Now if one would not want to choose between the two, stablecoins, or cryptocurrencies based on gold, are an interesting option. Although regulatory risks are still high for these products, stablecoins are a promise of investing in something more digital than gold and more stable than cryptos, since you can get redeemed in physical gold.

Slightly costlier than gold exchange traded funds (ETF), stablecoins have additional constraints, though. These are related to the security of private keys, regulatory uncertainties and limited liquidity.

In order to avoid this, the best option for an investor with a survivalist inclination would be to allocate a portion of one's assets to classical physical gold, and another portion to a pure cryptocurrency wallet. The two asset classes are complementary and bring diversification to each other's specific risks. Correlation between gold returns and Bitcoin returns is weak, signaling that the rise of cryptos isn't hurting demand for gold.

Gold and Bitcoin are bound to keep receiving more attention from Europe's angry savers, and the search for alternative stores of value will intensify in coming years.

So far, savers have grudgingly accepted to earn zero interest rates on their savings accounts, which were negative once inflation was deducted. At a certain point, they could well get negative nominal rates on their bank savings accounts, which means they would sink even deeper into negative territory after inflation.

In a very real sense, gold and Bitcoin are another name for mistrust.