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Ben Bernanke does not control the gold price: World Gold Council
Ana Komnenic | August 1, 2013
The World Gold Council has spoken: Stop holding your breath at every word out of Ben Bernanke's mouth.
In a research paper titled "Gold and the US interest rates: a reality check" the organisation warns against putting too much weight on the US Federal Reserve's hints that it may or may not wind down QE.
"While negative interest rates support gold investment demand and rising rates increase the cost of investing in it," the report reads. "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."
Just last month the precious metal dropped to September 2010 levels after Ben Bernanke, soon-to-be-former chairman of the Federal Reserve, said that he had a "moderately optimistic forecast" for the US economy.
Most recently Bernanke answered a US senator's question about the gold price with:
"Nobody understands gold prices and I don’t really pretend to understand them either.”
In fact, the impact of US monetary policy on the gold price has gone down, the WGC says. With markets booming beyond American borders the WGC emphasizes that "gold is not solely tied to US sentiment and behavior."
Emerging markets make up nearly 70% of world-wide physical gold demand (including ETFS), while the US represents less than 10%.
Gold investments have been historically quite positive, the WGC claims, with long-term average annual returns of 6-7%.
Putting too much emphasis on the US interest rates "oversimplifies the issues currently at play," said Juan Carlos Artigas, head of investment research at the Council.
"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," said Artigas, citing the Chinese market where gold consumption jumped by 132% between 2007 and 2012.
"Even with the highest rate of interest, the core value of gold is to balance out a portfolio," says Artigas. "Most investors are under allocated; optimal levels are identified as between 2% and 10%."
To view the full Journal, please visit: http://www.gold.org/investment/research/regular
In a research paper titled "Gold and the US interest rates: a reality check" the organisation warns against putting too much weight on the US Federal Reserve's hints that it may or may not wind down QE.
"While negative interest rates support gold investment demand and rising rates increase the cost of investing in it," the report reads. "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."
Just last month the precious metal dropped to September 2010 levels after Ben Bernanke, soon-to-be-former chairman of the Federal Reserve, said that he had a "moderately optimistic forecast" for the US economy.
Most recently Bernanke answered a US senator's question about the gold price with:
"Nobody understands gold prices and I don’t really pretend to understand them either.”
In fact, the impact of US monetary policy on the gold price has gone down, the WGC says. With markets booming beyond American borders the WGC emphasizes that "gold is not solely tied to US sentiment and behavior."
Emerging markets make up nearly 70% of world-wide physical gold demand (including ETFS), while the US represents less than 10%.
Gold investments have been historically quite positive, the WGC claims, with long-term average annual returns of 6-7%.
Putting too much emphasis on the US interest rates "oversimplifies the issues currently at play," said Juan Carlos Artigas, head of investment research at the Council.
"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," said Artigas, citing the Chinese market where gold consumption jumped by 132% between 2007 and 2012.
"Even with the highest rate of interest, the core value of gold is to balance out a portfolio," says Artigas. "Most investors are under allocated; optimal levels are identified as between 2% and 10%."
To view the full Journal, please visit: http://www.gold.org/investment/research/regular
What drives gold: factors that influence the asset class and its role in a portfolio
(Gold Investor Volume 3, July 2013)
Download Gold Investor, Volume 3To some investors, gold seems arcane: a non-productive asset that is simply extracted and stored. To many others, gold plays an important role as a store of wealth and portfolio risk management vehicle. To most, a key challenge is finding an appropriate framework of reference: what gold does, what it does not do, how and why it responds to various economic environments.
This paper sheds the light on the most common misconceptions about gold such as the exclusive use of US-driven factors in explaining its performance. Our analysis shows that gold’s performance can be understood in the context of seven primary interrelated global factors:
- Currencies
- Inflation
- Interest rates
- Consumer spending and income growth
- Systemic and tail risks
- Short-term investment flows
- Supply-side drivers
Gold and US interest rates: a reality check
(Gold Investor Volume 3, July 2013)
Download Gold Investor, Volume 3As the US economy starts to show signs of rebalancing, paving the way for monetary policy normalisation, we explore the misconceptions surrounding the relationship gold has with real interest rates. We demonstrate that higher real rates are not unconditionally adverse for gold, as the effect of other factors needs to be considered. Thus, gold’s portfolio attributes are not compromised by a return to a normal interest rate environment. In addition, we find the influence US real interest rates have on gold has receded over the last few decades as demand has shifted from West to East.
Our analysis discusses the traditional link between gold, interest rates, and US investment markets and explains the different reasons why it changed over time: The global gold market has expanded and the supply and demand dynamics become more diverse. Gold is not only used as an investment tool in periods of low interest rates; it is also a consumer product that can be positively influenced by economic growth. The structural changes in the gold market, the remarkable recede of real rates’ importance and their economic impacts, and the increasing relevance of the demand from emerging markets are very likely to contribute to a shift of influence in determining gold prices.
Our analysis focuses on how real rates impact gold’s portfolio attributes such as returns, volatility and correlation. Each one of these attributes is a fundamental aspect of gold’s contribution in a portfolio. Our analysis further shows how a moderate real rate environment can be favourable to gold’s attribute
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