Gold News

Negative Rates, Surging Gold

Ready for the Fed to go below zero...?
 
A MONTH was all it took to wipe out a decade of jobs growth, writes Frank Holmes at US Global Investors.
 
US employers cut an unprecedented 20.5 million jobs in April, the most in history, while the unemployment rate rocketed up to 14.7%. As of last week, a head-spinning 33.5 million Americans, or one out of every five workers in the US labor force, have lost their jobs as a result of coronavirus lockdown measures.
 
With so many people out of work as we head into the second quarter, the next earnings season for S&P 500 companies is undoubtedly going to be one for the history books. FactSet reports that Wall Street analysts have already cut their second-quarter earnings estimates by 28.4%, the largest such decline on record.
 
Meanwhile, we're seeing corporations file for bankruptcy protection at an accelerated clip. As of May 7, an estimated 78 public and private firms with liabilities greater than $50 million have declared bankruptcy so far in 2020, including iconic brands J.Crew and Neiman Marcus. This puts businesses on track to meet and even surpass the 271 bankruptcies that occurred in 2009.
 
Against this backdrop, yields on the two-year and five-year Treasury fell to fresh record lows on Friday as the fed funds futures market continues to price in negative interest rates by early 2021.
 
 
If you recall, Alan Greenspan himself, former Federal Reserve chairman, said it was "only a matter of time" before negative rates spread to the US That was back in September.
 
Greenspan's prediction may well come true sooner than even he expected. With the two-year Treasury yield dipping to an anemic 10 basis points, the next test is 0% (or less!).
 
And remember, this is the nominal yield. Adjusted for inflation, it's already turned negative.
 
To be clear, I'm not advocating for or in favor of negative US rates. As others have pointed out, subzero rates don't guarantee an economic recovery. They don't appeared to have helped the Japanese or European economies in any way. Instead, they only seem to punish people with savings accounts, forcing them to spend their money or else see their balances slowly melt away.
 
I believe this is a huge contributor to why we're seeing higher gold prices right now. The yellow metal has surged above $1700 an ounce, or 34% above its per-ounce price a year ago.
 
Yes, gold doesn't pay dividends or interest, but then neither do Treasury bonds right now. And with S&P 500 companies losing revenue, an estimated $37 billion in dividends could be cut or suspended this year. Royal Dutch Shell recently cut its dividend for the first time since World War II. Last week, Disney became the latest blue-chip to suspend its dividend, despite the runaway success of its new streaming platform, Disney+.
 
Meanwhile, gold royalty company Franco-Nevada raised its quarterly dividend 4%, from $0.25 per share to $0.26 per share, marking the 13th annual consecutive dividend increase.
 
Rising investor appetite for gold is reflected in the fact that assets under management (AUM) in global gold-backed ETFs reached a new record high in April, according to World Gold Council (WGC) data. AUM stood at $184 billion as of April 30, with holdings also hitting a new all-time high of 3,355 tonnes. Assets in such ETFs grew in 11 of the 12 previous months, adding 80% to total AUM. 
 
 
Although demand for gold jewelry has been negatively impacted by the Covid-19 crisis, "history suggests that the likely strength of investment demand may offset this weakness," the WGC writes in its April report.
 
For more than a couple of months now, I've said that gold mining companies will have a strong first (and second) quarter thanks to higher metal prices. Stock prices, as you know, are largely driven by revenues and free cash flow (FCF).
 
FCF is what companies have in the bank after paying operating costs, taxes and other expenses. The higher the cash flow, the better the company can expand its business and reward shareholders.
 
Longtime readers of the Investor Alert and Frank Talk are probably aware that we like gold royalty companies here at US Global Investors, and in the first quarter of 2020, the "big three" royalty names collectively generated a remarkable $402 million in positive free cash flow.

Frank Holmes is chief executive officer and chief investment officer of US Global Investors Inc., a registered investment adviser managing approximately $4.8 billion in 13 no-load mutual funds and for other advisory clients. A Toronto native, he bought a controlling interest in US Global Investors in 1989, after an accomplished career in Canada's capital markets. His specialized knowledge gives him expertise in resource-based industries and money management.

See the full archive of Frank Holmes.

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