Here's where the best investors run when the world flips upside down

Reuters

The list of millionaire and billionaire investors loading up on gold reads like an all-star lineup.

Their accolades are far superior to 99 percent of the investing universe. Some of their returns look like anomalies. But they’re not one-hit wonders. Their investing success has lasted decades. Ignoring what they’re doing with their capital would be a huge mistake.

(We show you other good reasons to own gold in our free special report that you can download here.)

What the best investors are buying

Take George Soros, for example. Soros earned US$1 billion for himself by shorting the British pound in the early 1990s. It was his bet that “broke the Bank of England.” Further, Soros and Jim Rogers earned investors 3,365 percent returns in their Quantum Fund in just 11 years.

Today, Soros holds a US$264 million stake in gold-miner Barrick Gold (traded on the New York Stock Exchange, ticker ABX). It is the fund’s second-biggest holding. Soros also bought over 1 million option contracts on the SPDR Gold Trust, which tracks the price of gold bullion.

Stan Druckenmiller – who earned an average of 30 percent annually for 30 straight years without a single losing year – has his largest allocation in gold. The SPDR Gold Trust totals 18 percent of his portfolio.

David Einhorn of Greenlight Capital, another well-known fund manager, has a US$165 million stake in VanEck Vectors Gold Miners ETF (GDX). Einhorn has returned 16.5 percent annually for his investors since 1996.

Other big investors like John Paulson, Paul Singer, and Carl Icahn all own large positions in gold, too.

The list goes on… for a simple reason. As Druckenmiller says about why his largest allocation is in the SPDR Gold Trust, it’s because of the “absurd notion of negative interest rates.”

The financial world turned upside down

Negative interest rate policy (NIRP) has flipped the world of finance upside down.

It is an idea that theoretically doesn’t make sense. Negative interest rates mean the borrower doesn’t compensate the lender with interest. Instead, the lender pays the borrower to take his money.

No one thought the financial world would see rates go negative. Not even former U.S. Federal Reserve head Ben Bernanke (in 2009):

“No one will lend at a negative interest rate; potential creditors will simply choose to hold cash, which pays zero nominal interest.”

Reuters

Take home mortgages, for example. You take out a mortgage to pay for a house. The bank lends you money. And in return, you pay the mortgage off little by little with interest… until the loan is repaid in full.

At no point would it make sense for the bank to pay the homebuyer… especially because it was the bank that lent the money.

But in Belgium and the Netherlands, banks have started paying people to take out mortgages – as if the houses were worth less than nothing. With rates at minus 1 percent on a $500,000 mortgage… you’d be getting paid $5,000 per year to live in it.

Negative rates are affecting consumer behavior, too

Homeowners are motivated to pay their utility bills up front… rather than month to month. Since negative rates cost money, it makes sense to pay all the bills up front. And shift the consequences of negative rates onto the utility company (the “seller”).

The same thing will play out with business owners – “buyers” – who want to pay all their invoices up front… then draw down their credit balances.

Yet the sellers (i.e. utility companies, credit card companies, lumber yards) will all want to delay receiving payments up front. They don’t want the burden of negative deposit rates. They’ll delay payments… hoping tomorrow will bring better days.

That is exactly what we’re seeing in Switzerland.

Taxpayers in Zug, Switzerland are now being asked to hold onto their money. Due to negative interest rates, the canton of Zug doesn’t want the money. Collecting the tax dollars will cost about US$2.5 million per year. According to media reports, a Zug authority said recently, “The canton has an interest in receiving money as late as possible – so it pays less negative interest.”

Think about where our world stands when the government doesn’t want your money…

And in Japan, negative rates aren’t forcing the Japanese to spend. It’s having the opposite effect. Sales of house safes – to stash cash – are up 250 percent over the past year. Further, there are reports that some Japanese elderly are purposely committing crimes to end up in prison for the free food and healthcare – because the negative rates are destroying their savings.

These are just some of the unintended consequences that central bankers tried to prevent. Yet more and more governments plunge into the depths of the unknown – with negative rates.

The negative-yield bond market is growing

Fitch Ratings notes 14 governments have at least one benchmark bond yielding below zero – totaling US$10 trillion in May. Up from US$7 trillion since February.

Fitch also notes the US$10 trillion is costing governments around the world over US$24 billion per year.

Another US$15.4 trillion worth of bonds yield an average of 0.13 percent. Those bonds are likely negative after factoring in inflation (real interest rates).

You can see the world’s adoption of negative-yielding bonds below.

Reuters

Negative-yielding bonds are becoming a larger portion of the global bond market, especially over the past two years.

Remember, negative rates mean the value of your money erodes. Depositing $100 at minus 1 percent interest in the bank doesn’t earn interest. It loses it. It’s worth $99 next year. You’re guaranteeing a loss on your hard-earned money. Even before factoring in inflation and fees.

It’s truly a world flipped upside down. We’re seeing the unintended consequences playing out today. And they’ll accelerate as central banks continue their flawed experiments.

As investors lose faith in central bankers’ power and as paper money becomes more worthless by the day, gold looks more and more attractive. This is why many of the world’s best investors have been buying billions of dollars in gold-related investments. They’re simply getting ahead of the curve.

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