The World Gold Council has today released its latest quarterly investment journal, Gold Investor, which includes the research paper “Gold and US interest rates: a reality check”. The paper analyses the impact on the gold market of higher interest rates, as financial markets factor in the impact any decision by the US Federal Reserve to wind down QE and tighten monetary policy might have. Its conclusion is that, while negative interest rates support gold investment demand and rising rates increase the cost of investing in it, a normal rate environment – with real interest rates ranging between 0% and 4% or approximately 2.5% to 6.5% in nominal terms – is not automatically adverse to gold. In such a rate environment, gold’s inclusion in a portfolio has historically been beneficial to investors.
The analysis shows that in a normal real rate environment:
- Returns for gold are in line with the long term average of an annualised 6-7%.
- Volatility is significantly lower than during very high or low real rate environments.
- Correlation between gold and global equities is slightly negative, in line with its long-term average correlation of zero.
Additionally, the impact of US real rates on the gold price appears to have reduced in significance. Although the US market can lead investor behaviour in the short term, the gold market has become more diverse in both sectors and geographies in recent years. The long-term performance of gold is not solely tied to US sentiment and behaviour. Emerging markets are now increasingly driving the long term view of gold. US physical demand for gold (including ETFs) accounts for less than 10% of the market, while emerging markets make up close to 70% of annual demand.
Juan Carlos Artigas, Head of Investment Research at the World Gold Council said:
“The US investor market clearly has a strong influence on gold due to the size of transactions and, to some extent, its effect on investor behaviour elsewhere, our analysis demonstrates that the inverse link between US interest rates and the gold price oversimplifies the issues currently at play.
“In the event of a return to a more normalised real rate environment in the US it is worth remembering that investment demand is not the only arbiter of gold prices, nor does it originate solely in the US. A case in point is the unprecedented growth in Chinese gold consumption, which rose by 132% between 2007 and 2012 and looks set to continue even if economic growth were to slow to 5-6%.
“While headlines have focused on the recent price moves, the long term drivers of gold including emerging market growth and central bank demand hold firm, particularly when combined with a likely reduction in supply from both mine production and recycling. Even with the highest rate of interest, the core value of gold is to balance out a portfolio. Most investors are under allocated; optimal levels are identified as between 2% and 10%.”
This edition of Gold Investor also includes two further thought pieces: What drives gold? Factors that influence the asset class and its role in a portfolio’ and ‘The role for gold in defined-contribution plans: Mexico case study’.
