holterThe effect on commodities:
If NIRP looks like becoming a reality, commodity markets should begin to adjust to a general state of backwardation, reflecting the anticipated cost of holding cash deposits compared with owning physical commodities. Speculators holding short positions and therefor long of dollars will expect a cost arising from negative interest rates to replace the positive interest rate return normally reflected in futures pricing.
In other words, all market participants would be better off being long instead of short.
The effect could be dramatic…

JPM gold vaultNegative interbank rates would obviously be good for precious metal prices, because the bullion houses will find it more costly to hold dollars than gold and silver, reversing the standard position in paper markets.
Unfortunately for them,
physical liquidity of all precious metals is probably too low for such a switch to take place with major market disruption.

monkey money

Today’s obvious mispricing of sovereign bonds is a bonanza for spending politicians and allows over-leveraged banks to build up their capital. This mis-pricing has gone so far that negative interest rates have become common.
Macroeconomists will probably claim that so long as central banks can continue to manage the quantity of money sloshing about in financial markets they can keep bond prices up.
But this is valid only so long as markets believe this to be true.
Put another way central banks have to continue fooling all of the people all of the time, which as we all know is impossible.


By: Eric Sprott & David Baker
On July 18th, 2012, the German government sold US$5.13 billion worth of 2-year bonds at an average yield of -0.06%. Please note the negative symbol in front of that yield number. What this means is that the German government was able to borrow money for less than nothing. When those specific bonds expire in two years’ time, the German government will pay back the original $5.13 billion minus 0.06%. Expressed another way, investors knowingly and willingly bid the German government $5.13 billion in exchange for bonds that will pay no interest and are guaranteed to lose them money on expiration.1 Welcome to the new status quo.

Germany is not alone. Over the past six months, the countries of Netherlands, Switzerland and France have also issued short-term government debt at negative yields. The bond market auctions for these select countries have seen overwhelming demand, making NIRP (Negative Interest Rate Policy) the new ZIRP (Zero Interest Rate Policy).

NIRP is different than ZIRP, however. NIRP causes outright financial destruction. Economies can hardly survive extended periods of ZIRP rates, let alone survive a long-term NIRP environment. It just doesn’t work.