Normal interest rate environment is ideal for investing in Gold: WGC
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.
Negative interest rates environment supports gold investment demand while rising rates increase the cost of investing in it. However, a normal rate environment at 0-4% is not adverse to gold and in such a scenario investors could benefit by including gold in their portfolio, according to a new research paper titled 'Gold and US interest rates: a reality check'published by the World Gold Council.
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%.”
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