Don Coxe: Negative Rates to Take Gold to Heights Never Before Seen in History of Mankind
As a historian, Don Coxe is cautious in saying there is something new under the sun. He didn’t think he would live long enough to see the creation of an entirely new asset class, which is negative and seemingly endless in scope. Negative yields were first created by the self-financing Swiss to get the euro-zone moving again. Don likens them to the multiplying of bad germs, and finds it likely that there will be painful corrections in the economy, the stock market, or both.
Negative yields are a big challenge to the mathematics of wealth accumulation. This fastest-growing asset class not only won’t pay you, but it won’t pay you back. It challenges the capital asset pricing model, which is the basis of all actuarial valuations and pension plans. Paying dividends to stock holders and interest to their bankers and bond holders had been the process since the birth of capitalism. It’s a new crisis for social security and pension funds around the world.
Stock markets are going to new recovery highs, without any good economic news to justify them. No one is predicting economic growth above 2.5% at most. There is nothing embedded in this to justify the price-earnings ratio aside from the dividends which are being financed by issuing extremely low-yield bonds. If the only formula for giving rewards to investors is to borrow to pay dividends and to buy back stock, then a major stock market sell-off will happen at some point.
All of this is good for gold and silver because of the rising value of financial assets, and the sheer scale of government debts. Gold and silver are among the top performing asset classes in the world. As we see the gold bull market unfolding, we should invest in mining companies, which bring more of a predictable return. When going into mining stocks, one should have a view that things will get better for the price of bullion. Year-to-date the mining companies are up roughly 95%, and gold is up 26.7%, which certainly fits the bill for a bull market.