Bond investors: want more yield? Buy gold!

What is gold telling us about the topsy-turvy reality of negative yielding debt?

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Our chart below, a thoroughly contemporary offering, would have been impossible before 2015.

Debt can be traced back to at least the Sumerians in 3000 BC. In the five millennia since, borrowers have paid an interest rate which reflects some mix of their creditworthiness and the prevailing economic conditions.

By 2015, the monetary meddling of central bankers led interest rates to pierce the zero lower bound and trade at negative yields. In this topsy-turvy reality, borrowers are paid to borrow. Lenders pay for the privilege of lending. The laws of finance have been inverted. We live in interesting times.

To the chart. In blue is gold, the eternal monetary asset. In green, the amount of negative yielding debt globally – currently amounting to a staggering $12.2 trillion. That is $12,200,000,000,000. It doesn’t even fit on my calculator! Sliced another way, $1,650 of negative yielding debt for every person on planet Earth. The more negative yielding bonds, the more gold has risen. 

Source: Bloomberg: Bloomberg Barclays global aggregate negative yielding debt market value USD, gold USD spot 

At negative yields both cash and bonds are dangerous investments, eroding wealth even before the ravages of inflation. The US dollar – the global reserve currency – has lost 95% of its purchasing power since World War I. How then do we keep capital safe?

There are two longstanding criticisms of gold. Firstly, it offers no yield. Secondly, owners must protect their treasure – there is a cost to store it. As Warren Buffett said “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it.” In 2019, these are irrelevant. Government bonds increasingly offer less than no yield and negative rates penalise investors for their desire for a safe haven. In fact, the value of all negative yielding sovereign bonds is larger than the entire world gold stock, which is only $10 trillion. In this light, gold is a rational choice for wealth preservation.

This leads us to once again consider the bull case. Gold is unpredictable, liable to make forecasters look foolish. Despite this, in October 2018 we wrote about the ‘jaws of a golden opportunity’ in gold equities. The gold holdings in our portfolios are up 50% since then.

Gold stocks remain a supercharged play on the commodity. The sector is experiencing a wave of consolidation. Despite the rise, the entire gold mining sector market capitalisation is smaller than Home Depot, the US DIY retailer.

I would reiterate what we said nine months ago that we see two ways to win: macro events are developing favourably for gold and the market is reappraising the value of the equities.

Last year, central banks bought more gold than in any year since 1971, the year the US ditched the gold standard. This seems likely to continue as it was led by emerging markets swapping the paper liabilities of their trade war adversaries for hard assets.

Geopolitical upheaval, US interest rate cuts and a return to quantitative easing in Europe should help gold. When the owners of negative yielding bonds, wake up and scramble to preserve their purchasing power they could be buying at much higher prices. Gold continues to play a key role in our portfolio as part of the armoury in the battle against wealth erosion.


Ruffer is a limited liability partnership, registered in England with registered number OC305288 authorised and regulated by the Financial Conduct Authority © Ruffer LLP 2019. The views expressed in this article are not intended as an offer or solicitation for the purchase or sale of any investment or financial instrument. The information contained in the document is fact based and does not constitute investment advice or a personal recommendation, and should not be used as the basis for any investment decision. References to specific securities should not be construed as a recommendation to buy or sell these securities.

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