If Negative Interest Rates Come to the US, Would You Follow Mr. Buffett?BRK-A) held its Annual Shareholders Meeting a few days ago, Chairman Warren Buffett indicated he would consider taking money out of banks if they began charging to hold deposits.
Warren Buffet is raising a very valid point and gives us all something to think about. What would we do if our bank or financial institution suddenly decided to follow the policy of "negative interest rates" and begins charging to hold our hard earned cash?
The answer to this question depends on many variables, but for purposes of simplicity, there are a few points to be considered, such as:
- The size of the cash holdings relative to the total assets of the individual
- How soon these funds will be needed
- Do all of these monies need to be held in risk-free investments/deposits?
Now that brings us to the dilemma facing Berkshire Hathaway. It is no secret that at any given time the company is holding vast amounts of cash or cash equivalents. One of the suggestions put forth by Mr. Buffett is contained in the following commentary to CNBC, " If currency in a bank is worth less than currency in your hands, that could produce something in the way of behavior. It's a different world if you have a lot of money in Euros as we do - you're better off putting it under your mattress than in a bank."
Practically speaking I doubt Mr. Buffett would consider placing Berkshire Hathaway cash under anything similar to a mattress. It is most likely that since holding physical bank notes is not even a consideration at Berkshire Hathaway, there has to be a better alternative for Mr. Buffet to consider when deciding what to do with cash in a "negative interest rate environment".
While there are many alternatives to consider, I would like to focus specifically on gold. Mr. Buffet commented on the yellow metal in his 2011 annual letter to shareholders by saying that it has two shortcomings - not being of much use nor procreative. In addition, he made an impressive call at that time since its price was $1750 per ounce compared to $1272 where it is currently trading.
But if we look at how gold has performed since the beginning of 2016, we gain a different perspective. The gold price has risen from below $1100 making it one of the strongest performers this year. There are many factors which have caused gold's swift rise this year, but no doubt one of those must be the decision by The Central Bank of Japan in late January to introduce a policy of negative interest rates. The Bank of Japan, therefore, joins many other European Central Banks that already have negative interest rate policies in place.
The move by the Japanese Central Bank may have been a primary factor in convincing many international fund managers to purchase gold due to the costs involved with holding deposits at financial institutions charging for this privilege. Certain Central Banks most likely added to their gold reserves.
Gold and gold-related investments have many advantages in the current economic and financial market climate which Mr. Buffet should now consider. I plan on exploring some of these in my future articles.
Published on May 11, 2016By Tzemach Richter