From my SO the other night:

Gold pays interest when there's negative rates.

If someone holds gold, they have to store it in a manner that will cost (money or time) and if someone holds gold in a vault, they have to pay a storage fee. I don't see how gold pays interest when rates are negative. What am I missing?

  • 3
    How would a piece of metal pay interest? – quid Jul 20 '16 at 18:20
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    Ask SO. We can't read minds. Can't imagine what they were thinking on this. – JTP - Apologise to Monica Jul 20 '16 at 18:27
  • What you wanna do is bury it in your backyard--no custodian fees – public wireless Jul 20 '16 at 20:19
  • The value of gold does whatever it darned well pleases, just like every other usually-scarce commodity. Despite all the hype, there really isn't anything very unique about it. – keshlam Jul 22 '16 at 22:31

The point of what you heard is likely that gold is thought by some to hold its value well, when the money market would provide negative interest rates. These negative interest rates are a sign of deflation, where cash money is worth more in the future than it is today.

Normally, under inflation, cash money is worth less in the future than it is today. Under 'normal' circumstances where inflation exists, interest paid by the bank on money held there generally keeps up with inflation + a little bit extra. Now, we are seeing many banks offering interest rates in the negatives, which is an acknowledgement of the fact that money will be worth more in the future than it is today.

So in that sense, holding physical gold 'fights' deflation [or, negative interest rates], in the same way that holding physical cash does [because if you hold onto a $10k bundle of bills, in 10 years you can walk into a bank and it will be worth $10k in future dollars - which in a deflationary market would be more than it is worth today]. Some view gold as being better at doing this than just holding cash, but that discussion gets into an analysis of the value of paper money as a currency, which is outside the scope of this answer.

Suffice to say, I do not personally like the idea of buying gold as an investment, but some do, and partly for this reason.

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    Negative interest rates are not 'an acknowledgement of the fact money will be worth more in the future'. Banks can't predict the future. If anything, negative interest rates are an acknowledgement that central banks are going to do whatever it takes to promote lending and spending at the expense of savers. Lending and spending will generally lead to INFLATION if left unchecked, and make no mistake, INFLATION is the goal of central banks all over the world as that's the only solution to their massive govt. debt. Since gold holds its value, it can be thought of paying interest vs money@-% – public wireless Jul 20 '16 at 20:18
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    @publicwireless Take a look at this chart: nasdaq.com/markets/gold.aspx?timeframe=10y Did gold "hold its value" between 2007 & 2015? Yes. Did gold "hold its value" between 2011 & 2015? No. Gold price fluctuates, and its inherent value is, in my opinion, overstated. At the very least, it should be clear from the linked chart that the price of gold is not a steady, immutable thing. – Grade 'Eh' Bacon Jul 20 '16 at 21:22
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    What? There's a claim that gold is a hedge against inflation, now it seems it's a hedge against deflation as well? If the dollar doubles in value (not gonna happen) gold will still be the better asset? – JTP - Apologise to Monica Jul 20 '16 at 22:33
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    @JoeTaxpayer I think the argument is something like "Gold holds value against inflation, compared with cash in a sock drawer earning no interest. Gold holds value against deflation, compared with cash in a bank earning negative interest." Frankly I am convinced by neither hypothesis. – Grade 'Eh' Bacon Jul 21 '16 at 12:45
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    An upvote for your last paragraph. Tough to offer a defense of a position you don't subscribe to. – JTP - Apologise to Monica Jul 21 '16 at 12:53

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