Don't make the mistake of ignoring what an all-star roster of the world's richest investors is doing right now. They are buying billions of dollars' worth of gold.
(This is one of many reasons that it makes a lot of sense to have gold in your portfolio. We explain the why and the how in a free 22-page special report you can download here.)
For example, hedge fund legend Stanley Druckenmiller has earned an average of 30% a year for 30 years, without a single negative year. And currently, 18% of Druckenmiller's portfolio is made up of the SPDR Gold Trust (GLD) , an exchange-traded fund that tracks the price of gold bullion.
George Soros, the man who "broke the bank of England" in the early 1990s, earned $1 billion by shorting the British pound. Along with Jim Rogers, Soros also earned investors a 3,365% return in just 11 years with the Quantum Fund.
Now, Soros owns a $264 million stake in Barrick Gold (ABX) , the largest gold mining company in the world. It is his fund's second-largest holding. But that's not the only gold Soros owns. He also bought more than 1 million option contracts on the SPDR Gold Trust.
Another well-known investor with a stake in gold is David Einhorn of Greenlight Capital. Einhorn's investors have seen average annual returns of 16.5% since 1996. Now, he has a $165 million stake in VanEck Vectors Gold Miners ETF (GDX) .
The list goes on with other big names like Paul Singer, Carl Icahn and John Paulson all owning large stakes in gold.
Why are so many big-name investors flocking to gold? As Druckenmiller said about his own large stake in the SPDR Gold Trust, it's because of the "absurd notion of negative interest rates."
Negative interest rate policy (NIRP) has flipped the world of international finance on its head. The concept of negative interest rates does not make theoretical sense. Instead of the borrower paying the lender with interest, the lender pays the borrower to take his money. Even former Federal Reserve Chairman Ben Bernanke didn't think this would happen. In 2009 he said, "No one will lend at a negative interest rate; potential creditors will simply choose to hold cash, which pays zero nominal interest."
But some are lending at negative interest rates. For example, consider home mortgages. Normally, a person would take out a mortgage to pay for a house. The bank would lend that person money, and the borrower would slowly pay it back (with interest) until the loan was repaid in full. This is logical. It wouldn't make sense for the bank to pay the homeowner to take out a mortgage. It was the bank that lent the money in the first place.
But banks in the Netherlands and Belgium have been paying people to take out mortgages. In adopting negative interest rates, it's almost like the banks assume the homes are worth less than nothing. For example, someone who takes out a $400,000 mortgage with a minus-1% interest rate gets paid $4,000 a year to live in his or her house. But the absurdity of negative interest rates doesn't stop there.
In some places, homeowners now want to pay their utility bills up front instead of month to month. They would rather pay all their bills right away since holding the money and "earning" a negative interest rate costs them money. The consequences of negative interest rates then shift to the utility company, the "seller" of the services.
Business owners ("buyers") also want to pay all their invoices up front, then draw down their credit balances with extremely low or negative rates. But the sellers, such as credit card companies, utility companies and car manufacturers, all want to delay receiving their payments. Negative interest rates cost them money, so they'll delay payments in hopes that things will improve.
This awkward exchange of goods and services is exactly what is happening in Switzerland. The Swiss canton of Zug is asking taxpayers to hold on to their money. The canton doesn't want the money, because negative interest rates means it loses money. Collecting taxes will cost the canton around $2.5 million each year. One Zug authority said, "The canton has an interest in receiving money as late as possible -- so it pays less negative interest."
Where is the world headed when even the government doesn't want your money?
In Japan, negative interest rates are backfiring. Instead of encouraging spending, people are stashing their cash in safes, with sales of house safes increasing 250% over the last year. Even more extreme, there are reports of some elderly Japanese people purposely committing crimes so they end up in prison. They are doing this to get free food and health care from the prison system, since negative interest rates are eating up their life savings.
As of this week, 20-year Japanese government bonds now have negative yields. Its 30-year bonds have a yield of just 0.015%. And in Switzerland, all government bonds, even the ones that mature in 50 years, yield less than zero.
As governments venture farther into unknown economic territory, they'll discover more and more unintended consequences of negative interest rates. Central bankers are having a hard time predicting and preventing such consequences. According to Fitch Ratings, there are 14 governments with at least one negative-yielding benchmark bond. In May, these negative bonds totaled $10 trillion, which was up from $7 trillion since February. This $10 trillion is costing governments more than $24 billion a year.
Last week, the Bloomberg Global Developed Sovereign Bond Index added more than $1 trillion in negative-yielding government bonds, an 11% increase compared to the week before, according to the Financial Post. The chart below shows that over the last two years, bonds with negative yields are taking up a larger proportion of the global bond market.
Negative interest rates mean that depositing $1,000 into an account with minus 1% interest doesn't earn you any money. It loses money. Your $1,000 is worth $990 next year, and even less the next. And that's before bank fees and inflation. Negative interest rates guarantee that you will lose money.
Central banks' recent experiments are having unintended consequences. We are clearly seeing that in today's bond market. The financial world has turned upside down. As paper money becomes less valuable by the day and people lose faith in central banks, gold looks better and better.
The world's best investors can see what's happening. By buying billions of dollars' worth of gold and gold-related investments, they are getting ahead of the curve. And reacting to a financial world that no longer makes any sense.
Three of the best ways you can invest in gold are found in our free special report that you can download here.
Kim Iskyan is the founder of Truewealth Publishing, an independent investment research company based in Singapore. Click here to sign up to receive the Truewealth Asian Investment Daily in your inbox every day, for free.