Implications for gold
The consequences of negative dollar rates for the gold price will be to drive it higher, probably substantially so. There are several aspects to consider: the effect on the dollar, the backwardation issue, the technical position in the market and the fact that as an asset class it is underrepresented in portfolios.
There can be no question that negative rates, either imposed by the Fed or the commercial banks, will result in a lower dollar. As a currency it is over-owned by foreigners, and the move below the zero bound into similar interest rate territory as the euro and the yen will reverse conditions in the fx swap market with predictable consequences. On Comex, hedge funds in the Managed Money category, whose pair trade is to sell dollar/buy gold or the opposite, hold 67,956 net long contracts (16 February) compared with an average long-term net long position of 110,000, leaving them underexposed to a falling dollar and rising gold price. The slightest indication that overnight rates are heading below the zero bound would rapidly reverse this position, potentially driving them to be record long. And for the pure traders among them a developing slump for the dollar on the foreign exchanges would be enou . . .