Markets

Visualizing the 700-Year Fall of Interest Rates

Published

12 months ago

February 4, 2020

Dorothy Neufeld

Visualizing the 700-Year Decline of Interest Rates

Visualizing the 700-Year Decline of Interest Rates

How far can interest rates fall?

Currently, many sovereign rates sit in negative territory, and there is an unprecedented $10 trillion in negative-yielding debt. This new interest rate climate has many observers wondering where the bottom truly lies.

Today’s graphic from Paul Schmelzing, visiting scholar at the Bank of England (BOE), shows how global real interest rates have experienced an average annual decline of -0.0196% (-1.96 basis points) throughout the past eight centuries.

The Evidence on Falling Rates

Collecting data from across 78% of total advanced economy GDP over the time frame, Schmelzing shows that real rates* have witnessed a negative historical slope spanning back to the 1300s.

Displayed across the graph is a series of personal nominal loans made to sovereign establishments, along with their nominal loan rates. Some from the 14th century, for example, had nominal rates of 35%. By contrast, key nominal loan rates had fallen to 6% by the mid 1800s.

Centennial Averages of Real Long-Term “Safe-Asset”† Rates From 1311-2018

%	1300s	1400s	1500s	1600s	1700s	1800s	1900s	2000s
Nominal rate	7.3	11.2	7.8	5.4	4.1	3.5	5.0	3.5
Inflation	2.2	2.1	1.7	0.8	0.6	0.0	3.1	2.2
Real rate	5.1	9.1	6.1	4.6	3.5	3.4	2.0	1.3

*Real rates take inflation into account, and are calculated as follows: nominal rate – inflation = real rate.
†Safe assets are issued from global financial powers

Starting in 1311, data from the report shows how average real rates moved from 5.1% in the 1300s down to an average of 2% in the 1900s.

The average real rate between 2000-2018 stands at 1.3%.

Current Theories

Why have interest rates been trending downward for so long?

Here are the three prevailing theories as to why they’re dropping:

1. Productivity Growth

Since 1970, productivity growth has slowed. A nation’s productive capacity is determined by a number of factors, including labor force participation and economic output.

If total economic output shrinks, real rates will decline too, theory suggests. Lower productivity growth leads to lower wage growth expectations.

In addition, lower productivity growth means less business investment, therefore a lower demand for capital. This in turn causes the lower interest rates.

2. Demographics

Demographics impact interest rates on a number of levels. The aging population—paired with declining fertility levels—result in higher savings rates, longer life expectancies, and lower labor force participation rates.

In the U.S., baby boomers are retiring at a pace of 10,000 people per day, and other advanced economies are also seeing comparable growth in retirees. Theory suggests that this creates downward pressure on real interest rates, as the number of people in the workforce declines.

3. Economic Growth

Dampened economic growth can also have a negative impact on future earnings, pushing down the real interest rate in the process. Since 1961, GDP growth among OECD countries has dropped from 4.3% to 3% in 2018.

Larry Summers referred to this sloping trend since the 1970s as “secular stagnation” during an International Monetary Fund conference in 2013.

Secular stagnation occurs when the economy is faced with persistently lagging economic health. One possible way to address a declining interest rate conundrum, Summers has suggested, is through expansionary government spending.

Bond Yields Declining

According to the report, another trend has coincided with falling interest rates: declining bond yields.

Since the 1300s, global nominal bonds yields have dropped from over 14% to around 2%.

bond yields declining

The graph illustrates how real interest rates and bond yields appear to slope across a similar trend line. While it may seem remarkable that interest rates keep falling, this phenomenon shows that a broader trend may be occurring—across centuries, asset classes, and fiscal regimes.

In fact, the historical record would imply that we will see ever new record lows in real rates in future business cycles in the 2020s/30s

-Paul Schmelzing

Although this may be fortunate for debt-seekers, it can create challenges for fixed income investors—who may seek alternatives strategies with higher yield potential instead.

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Energy

The Periodic Table of Commodity Returns (2021 Edition)

Which commodity had the best returns in 2020? From gold to oil, we show how commodity price performance stacks up over the last decade.

Published

2 weeks ago

January 8, 2021

Dorothy Neufeld

The Periodic Table of Commodity Returns (2011-2020)

Being a commodity investor can feel like riding a roller coaster.

Take silver. Typically known for sharp, idiosyncratic price movements, it faced double-digit declines in the first half of the decade, falling over 35% in just 2013 alone. By contrast, it jumped over 47% in 2020. Similarly, oil, corn, and others witnessed either steep declines or rapid gains.

The above graphic from U.S. Global Investors traces 10 years of commodity price performance, highlighting 14 different commodities and their annual ranking over the years.

Commodity Price Performance, From Best to Worst

Which commodities were the top performers in 2020?

The aforementioned silver tripled its returns year-over-year, climbing 47.9% in 2020. In July, the metal actually experienced its strongest month since 1979.

Rank	Commodity	Return (2020)	Return (2019)	Return (2018)
1	Silver	47.9%	15.2%	-8.5%
2	Copper	26.0%	3.4%	-17.5%
3	Palladium	25.9%	54.2%	18.6%
4	Gold	25.1%	18.3%	-1.6%
5	Corn	24.8%	3.4%	6.9%
6	Zinc	19.7%	-9.5%	-24.5%
7	Nickel	18.7%	31.6%	-16.5%
8	Gas	16.0%	-25.5%	-0.4%
9	Wheat	14.6%	11.0%	17.9%
10	Platinum	10.9%	21.5%	-14.5%
11	Aluminum	10.8%	-4.4%	-17.4%
12	Lead	3.3%	-4.7%	-19.2%
13	Coal	-1.3%	-18.0%	-22.2%
14	Oil	-20.5%	34.5%	-24.8%

Along with silver, at least seven other commodities had stronger returns than the S&P 500 in 2020, which closed off the year with 16.3% gains. This included copper (26.0%), palladium (25.9%), gold (25.1%) and corn (24.8%).

Interestingly, copper prices moved in an unconventional pattern compared to gold in 2020. Often, investors rush to gold in uncertain economic climates, while sectors such as construction and manufacturing—which both rely heavily on copper—tend to decline. Instead, both copper and gold saw their prices rise in conjunction.

Nowadays, copper is also a vital material in electric vehicles (EVs), with recent demand for EVs also influencing the price of copper.

Silver Linings

As investors flocked to safety, silver’s price reached heights not seen since 2010.

The massive scale of monetary and fiscal stimulus led to inflationary fears, also boosting the price of silver. How does this compare to its returns over the last decade?

silver returns 2011-2020

In 2013, silver crashed over 35% as confidence grew in global markets. By contrast, in 2016, the Brexit referendum stirred uncertainty in global markets. Investors allocated money in silver, and prices shifted upwards.

As Gold as the Hills

Like silver, market uncertainty has historically boosted the price of gold.

What else contributed to gold’s rise?

U.S. debt continues to climb, pushing down confidence in the U.S. dollar
A weaker U.S. dollar makes gold cheaper for other countries to buy
Low interest rates kept the returns of other safe haven assets low, making gold more attractive by comparison

Here’s how the price of gold has changed in recent years.

gold returns 2011-2020

Gold faced its steepest recent declines in 2013, when the Federal Reserve bank discussed tapering down its quantitative easing program in light of economic recovery.

Hitting the Brakes On Oil

Oil suffered the worst commodity price performance in 2020, with -20.5% returns.

For the first time in history, oil prices went negative as demand plummeted. To limit its oversupply, oil producers shrunk investment, closed wells, and turned off valves. Unfortunately, many companies still faced bankruptcies. By November, 45 oil producers had proceeded with bankruptcy filings year-to-date.

This stood in stark contrast to 2019, when prices soared 34.5%.

oil returns 2011-2020

As is custom for oil, prices see-sawed over the decade. In 2016 and 2019, it witnessed gains of over 30%. However, like 2020, in 2014 it saw huge losses due to an oversupply of global petroleum.

In 2020, total production cuts hit 7.2 million barrels a day in December, equal to 7% of global demand, in response to COVID-19.

Mining

Why Gold Mining Stocks Outperform Gold in Bull Markets

Gold mining stocks outpace gold returns in bull markets, but how? With higher gold prices, miners get ahead thanks to operating leverage.

Published

2 weeks ago

January 7, 2021

Niccolo Conte

Why Gold Mining Stocks Outperform Gold in Bull Markets

Gold is highly revered for its great returns and resilience during economic downturns, but during gold bull markets there’s something that regularly provides even greater returns: the ownership of gold mining stocks.

Over the past 20 years, gold mining stocks have outperformed the price of gold bullion in bull markets, offering what can be seen as a leveraged play on gold’s price appreciation.

While gold miners offer more potential upside, they also have higher volatility and greater downside during dips, making market timing and strong hands all the more important.

This infographic comes to us from Sprott and compares the returns of gold stocks and gold bullion in bull markets. It also explains how gold stocks outperform thanks to profit expansion, and shows why there might be more upside for gold miners to come.

How Operating Leverage Benefits Gold Mining Companies

During the 2000-2011 gold bull market, the price of physical gold rose 550%. While you might think that number is hard to beat, over the same period of time gold mining equities (represented by the NYSE Arca Gold Miners Index) returned more than 690%.

In the current gold bull market which started in 2015, gold mining stocks are up more than 182%, more than doubling gold bullion’s 78% returns.

This outperformance in bull markets is largely due to how gold mining companies use their operating leverage to maximize profits, resulting in their share prices appreciating.

Breaking Down Gold Mining Costs and Profits

As a gold mining company mines and produces gold, the gold is sold on the market fairly quickly to avoid the risk of gold’s price depreciating.

When the price of gold rises, miners immediately start to see greater profits from selling their ounces on the market. While the costs to mine gold also rise in bull markets, they rise less and at a slower rate.

The result of this is profit expansion: when operationally efficient gold mining companies are able to capture larger profits, resulting in increased operating and free cash flow.

Breakdown of Barrick Gold’s Profit per Ounce of Gold

Year	All-in Sustaining Costs/oz (in USD)	Realized Gold Price/oz (in USD)	Profit/oz (in USD)
2015	$831	$1,157	$326
2016	$730	$1,248	$518
2017	$750	$1,258	$508
2018	$806	$1,267	$461
2019	$894	$1,396	$502
2020	$984	$1,748	$764

During the current gold bull run which started in 2015, Barrick Gold’s average realized price per troy ounce of gold increased by 50%, while their all-in sustaining costs per troy ounce only went up by 18%.

This has resulted in the company increasing their profit per ounce of gold sold by a staggering 134% over the past six years.

Making the Most of Golden Times

While higher profit margins during bull markets are great, it’s up to the individual company to ensure the extra cash is being used prudently to efficiently support their operations.

Bull markets don’t last forever, and gold miners must use these prosperous times to strengthen their balance sheets, reward shareholders, and reinvest into projects which will provide future value and returns.

Dividend-paying gold stocks increase dividends to reward loyal shareholders, with the average dividend increase of top gold mining stocks in a bull market often doubling.

Over the decades, companies have gotten better at making the most of bull markets in order to be well-guarded for when gold prices stop appreciating, and eventually start declining.

Why Gold Mining Stocks May Still Be Undervalued

Even if gold mining stocks have already seen impressive returns over the past five years, there are some technical indicators which point to them still being undervalued compared to other equities and gold bullion.

The top 10 gold mining companies have seen their earnings per share estimates almost triple in the past two years.
The top 20 S&P 500 companies have seen around a -15% decline in their earnings per share estimates.

Along with having better earnings per share compared to the top U.S. equities, gold mining stocks may also be undervalued compared to gold bullion.

The gold mining stocks to gold bullion ratio is at historically low levels after having dropped more than 60% following the 2008 financial crisis. While gold bullion is increasingly seen as a safe haven asset for investors, gold miners are still overlooked despite their strong technicals.

Gold and Gold Miners’ Role in the Future Economy

As money printing has been the Federal Reserve’s main answer to an increasingly volatile economic climate, gold and its producers are set to play a crucial role in helping investors preserve their wealth.

Gold has yet again outperformed just about every other asset class in 2020, and gold miners offer even greater returns for those willing to manage the additional risk they present.

Gold mining stocks are much more volatile compared to gold bullion, and have a variety of additional risks dependent on their company structure, jurisdiction of operations, and operational efficiency. But for investors who are looking for exceptional returns in gold bull markets, they can be an alluring option.