How negative interest rates affect the portfolio structure

News Arnulf Hinkel, Financial journalist – 22.06.2016

One consequence of the financial crisis was the almost worldwide introduction of a policy of low interest rates and monetary easing by numerous central banks. Today not only a de facto zero interest rate policy prevails in the euro zone, the US and many other countries, but this policy also led to negative interest rates for particularly safe government bonds –  even for those with long maturities. In Germany, the interest rate for ten-year Bunds recently also dropped below zero. This will affect the investment decisions among all kinds of investors since the choice of tools to ensure a balanced portfolio has been reduced significantly. At the same time, negative interest rates further increase uncertainty on the financial markets since the current interest rate situation is unprecedented, at least to this extent, meaning the medium- and longterm effects are quite difficult to assess. A recent study by the World Gold Council examined how negative interest rates affect the role of gold as a safe haven. The study concluded that gold will tend to play a much more important role in investors' portfolios: depending on future interest rate developments, a one to two times higher proportion of gold than currently common could be expected. This estimation is justified by the now significantly lower opportunity costs for gold investments, the reduced number of alternative investment choices, the reduced confidence in fiat currencies due to the threat of currency wars, and the question how central banks will be able to spur future growth and combat deflation or inflation, respectively, now that effective interest rate policy options are largely exhausted.

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