×

This firm is hoarding gold and cash due to negative rates

The CEO of one of the world's largest reinsurance companies has launched a scathing attack on the policies of the European Central Bank (ECB) whilst revealing that the firm is diversifying into gold and currencies to tackle the current environment of negative rates.

Munich Re is a leading reinsurance firm - offering insurance for insurance companies. Based in Germany, the company has a 231 billion euro ($261 billion) investment portfolio which contains a 324 million euro investment in physical gold.

But negative rates in the euro zone have left the company thirsty for yield, which is vital in the world of insurance and reinsurance. Chief Executive Nikolaus von Bomhard has therefore announced that it is diversifying the company portfolio to try to combat the recent moves by the ECB.

"We are just trying it out, but you can see how serious the situation is," von Bomhard said at a press conference this week, according to a report by Reuters on Thursday.

German reinsurance giant Munich Re at the International Congress Center in Munich, southern Germany.
Sven Hoppe | AFP | Getty Images
German reinsurance giant Munich Re at the International Congress Center in Munich, southern Germany.

The CEO said that the firm has held gold as part of its portfolio and has recently added a cash sum in the two-digit million euro region. Munich Re confirmed to CNBC to Friday that the physical gold had been part of its portfolio for "some time" and that the move into currencies was a test to "check the feasibility and costs of such a move."

Von Bomhard, who is due to step down as CEO next year, took the opportunity on Wednesday to voice his dislike of negative rates alongside the announcement of the firm's more diversified portfolio.

"Sometimes it's lack of understanding or it's pure sheer horror when you look at what they (the ECB) are doing," von Bomhard said, according to a translation of the press conference on the company's website.

"The side effects of the ECB policy is of course now having quite devastating consequences. I think they are solving the wrong problem with the wrong remedies."

'Lost their mind'

A negative interest rate policy, or NIRP, essentially charges banks to deposit cash at a central bank in the hope that they will instead lend to the real economy. The ECB cut its deposit rate further into negative territory last week as well as announcing a raft of further easing measures like the buying of corporate bonds.

"What we are seeing right now is exceptional and I'd say that it's horror. You can see some of the markets already being emptied," von Bomhard added.

Excessive easing has meant that the central bank has bought assets in the region and now has "frightening" levels of ownership, according to the CEO. His words echo that of organizations like the Bank of International Settlements which has continuously warned of high asset prices and the potential for bubbles to form.

Erik Nielsen, global chief economist at UniCredit, was incredulous at Munich Re's decision to hoard cash and gold in this environment. Speaking to CNBC via email he explained that cash carried a negative yield because of the cost of keeping it safe.

"If they (are buying gold) physically then they really have lost their mind," Nielsen added. "I wonder if they are trying to send a political message (rather than investing their money wisely.)"

Lothar Mentel, chief investment officer at Tatton Investment Management, told CNBC via email that he could "just about" see the argument for stashing cash, but said that given the historic volatility of the gold price, stashing gold could be a "very risky approach to dealing with NIRP."