THE WEALTHY AND POWERFUL ARE HOARDING CASH AND GOLD FOR A VERY GOOD REASON.
The world’s
second-largest reinsurer, German Munich Re which is roughly twice the size of Berkshire Hathaway Re,
is
boosting its gold reserves and buying gold in the face of the punishing
negative interest rates from the European Central Bank, it announced
today.
As caught by Mark O'Byrne at
GoldCore and reported by
Thomson Reuters this afternoon,
the world’s largest reinsurer is far from alone in seeking alternative
investment strategies to counter the near-zero or negative interest
rates that reduce the income insurers require to pay out on policies.
Munich Re has held gold in its coffers for some time and recently
added a cash sum in the two-digit million euros, Chief Executive
Nikolaus von Bomhard told a news conference.
Nikolaus von Bomhard in Munich, on March 16, AFP via Getty Images
“We are just trying it out, but you can see how serious the situation is,” von Bomhard said.
The ECB last week cut its main interest rate to zero and dropped the
rate on its deposit facility to -0.4 percent from -0.3 percent,
increasing the amount banks are charged to deposit funds with the
central bank.
Munich Re is one of the largest reinsurance companies in the world -
It oversees €231 billion in investments. A small 3% allocation to gold
would equate to buying gold worth €8.19 billion. At the current spot
price of €1,130 per ounce that would equate to 7.2 million ounces or
225.4 tonnes of gold bullion
The news is interesting and we believe that other institutions will
follow in their footsteps and diversify into gold in order to protect
themselves from negative yields. We have not heard of any other non
central bank institutions diversifying into gold but it stands to reason
that a small percentage will follow in Munich Res footsteps.
* * *
It isn''t just gold: the German company confirms that when rates turn
negative enough, physical cash will be increasingly more valuable.
As
Bloomberg reports,
the German company will store at least 10 million euros ($11 million)
in two currencies so it won’t have to pay for the right to access the
money at short notice, von Bomhard said at a press conference in Munich
on Wednesday. “
We will also observe what others are doing to avoid paying negative interest rates,” he said.
Institutional investors including insurers, savings banks and pension
funds are debating whether it may be worth bearing the insurance and
logistics costs of holding physical cash as overnight deposit rates fall
deeper below zero and negative yields dent investment returns. The ECB
last week cut the rate on its deposit facility, which banks use to park
excess funds, to minus 0.4 percent.
“This may well become a mass phenomenon once interest rates
are low enough -- the only question will be where that exact point is,” said Christoph Kaserer, a professor of finance at the Technische Universitaet in Munich. “
For
large institutions, that may be the case sooner rather than later. The
ECB will react with countermeasures, such as limiting cash.”
As Bloomberg adds, Munich Re’s strategy, if followed by others, could
undermine the ECB’s policy of imposing a sub-zero deposit rate to push
down market credit costs and spur lending. Cash hoarding threatens to
disrupt the transmission of that policy to the real economy.
Munich Re, which oversees a total of 231 billion euros in
investments, wants to test how practical it would be to store banknotes,
having already kept some of its gold in vaults, von Bomhard said. This
comes at a time when consumers are increasingly using credit cards and
electronic banking to pay for transactions. Deutsche Bank AG Chief
Executive Officer John Cryan has predicted the disappearance of physical
cash within a decade.
“This shows the difficulties that the ECB is facing in its efforts to
stimulate the real economy,” said Andreas Oehler, a professor of
finance at Bamberg University in Bavaria. “Charging negative rates on
overnight liquidity doesn’t stimulate longer-term lending. All it does
is make companies’ and institutions’ payment transactions more
expensive.”
Incidentally, once the Fed's infatuation with playing central
planning doctor fizzles as the economy relapses into an accelerating
downward spiral, negative rates are coming to the US next, as such the
real-time experiments of how to evade a repressive monetary regime such
as those conducted by the Munich Re CEO will be particularly useful to
those who want to protect their assets once NIRP crosses the Atlantic.
http://www.zerohedge.com/news/2016-03-16/world%E2%80%99s-second-largest-reinsurer-buys-gold-hoards-cash-counter-negative-interest-rat
