As if its currency wasn't suffering enough, Australia decided to join the global currency wars…
A nation's currency is like a rough "stock price" of that nation. Generally speaking, if a country manages its finances well and engages in productive behavior, its currency appreciates over the long term. If a country racks up huge debts and runs its finances like a drug addict, its currency depreciates over the long term.
Australia's economy is closely tied to commodities. The country is dependent on iron ore, oil, aluminum, gold, copper, etc… All of which, save gold, have been crushed.
Australia is also heavily dependent on exports to China, the world's largest commodity consumer. And China's economy has been slowing.
This, combined with a soaring U.S. dollar, all adds to a collapse in the Australian dollar…
In hopes of stoking the economy, the Reserve Bank of Australia cut its benchmark interest rate by 25 basis points to a record-low 2.25%.
The markets, turning a blind eye to the decreasing effectiveness of quantitative easing, sent Australian stocks to their highest level since May 2008. Remember, a weaker currency means cheaper Australian exports.
The Aussie dollar plunged to its lowest level in six years compared with the U.S. dollar…
But rates in Australia could still have further to fall, as more and more sovereign yields go negative.
German government bonds offer negative yields on maturities up to six years, according to Tradeweb, along with those in Denmark. For five years, the Netherlands, Austria, Sweden, and Finland are in the club. For four years, add France and Belgium. In Switzerland, bonds out to a whopping 13 years in length have negative yields.
According to the same article, there are now $3.6 trillion of negative-yielding bonds in the world – 16% of the global government bond market.
One would think negative bond yields would scare buyers away… But some investors are buying these bonds betting deflation will be greater than the current, negative yields on these bonds – which would cause prices to rise as yields fell further.
There's a ton of capital in the world today… And that money is looking for the safety of government bonds – even if yields are negative
We like trades where the downside is limited, but the potential upside is immense. Buying bonds today is the opposite situation…
We doubt yields could fall much further into negative territory… But when rates rise, they could skyrocket; wiping out bondholders.
Before sharing what these negative yields mean for you, let's look at one more statistic…
The yield on Germany's 10-year bund fell to 0.306% today, dropping below Japan's 10-year yield of 0.335% for the first time in history.
Consider what that means… Japan has been battling deflation since the 1990s. And it has become one of the most indebted countries on Earth. Even with "Abenomics" – our name for the current prime minister's vow to beat deflation via Fed-like easing – Japan is failing.
Yet right now, investors take an even bleaker view of Europe. The government debt of Germany – Europe's economic engine – is priced as though investors expect it to endure the kind of stagnant economy Japan has suffered for decades.
So as we've said numerous times this year, low and negative sovereign yields are bullish for gold.
Investors often dismiss gold as an asset because it pays no yield… It simply sits in your safe. Now, gold can sit in your safe and not deplete your wealth – as holding certain sovereigns would.
Whether you like to own physical gold or you simply like to trade the metal… it's looking bullish today.
