Following King’s view about monetary policy and gold, and gold’s role in the investors’ portfolio in the face of Brexit, we continue to analyze the latest issue of World Gold Council’s Gold Investors. What else can we learn from this publication, especially about gold in a negative interest rate environment?
Gold prices are up nearly 20 percent since the beginning of the year. According to James Steel, Chief Commodities Analyst at HSBC, one reason for that jump was the increasing number of central banks introducing negative interest rates. Indeed, almost 27 percent of the world’s GDP is from economies which now have negative rates. Why negative interest rates are positive for the price of gold? Steel mentions six reasons, but we will present only the three most important ones. First, negative interest rates have been introduced because of continued low economic growth and financial market volatility – gold thrives in such environment when there is a lot of economic uncertainty and distress. Moreover, the NIRP generates uncertainty itself, as nobody knows its consequences and as it creates a belief that central banks might run out of effective monetary policy options. Second, negative interest rates reduce the opportunity cost traditionally associated with buying bullion. Third, negative rates penalize savers and encourage people to spend money or hold cash. However, gold may be more convenient as a store of wealth, especially for more affluent corporations or individuals.
The negative interest rates are special headwinds for pension funds. Therefore, Juan Carlos Artigas, Director of Investment Research at the World Gold Council, argues that pension funds should consider adding gold to their portfolios, as gold usually shines in a low interest rate environment.
There are two more articles in the last edition of Gold Investor. Jiao Jinpu, Shanghai Gold Exchange chairman, describes the first month of functioning of the Shanghai Gold Benchmark Price. Shayne McGuire who runs the Gold Fund for Teacher Retirement System of Texas (the 8th largest pension fund in the United States) said that the company’s decision to invest in gold as an asset separate from commodities was based on the diversification benefits to the overall portfolio. He also believes that the notion of “quantitative failure” – that unconventional monetary policies are becoming counterproductive and that central banks might lack tools to manage the future macroeconomic environment – has benefited gold significantly. Interestingly, McGuire argues that gold is one of the newest major asset classes, as the metal has effectively only been trading as a risk asset for 45 years with only two bear markets and two (or three, if we include 2016) bull markets.
Summing up, according to the experts cited by the WGC, negative interest rates are a bullish factor in the gold market. This is true right now, but it does not always have to be like that. Remember quantitative easing? Initially, it was bullish for gold as hell, but later the relationship disappeared or even turned around. The reason is that the shiny metal is a hedge against uncertainty. The NIRP benefited gold this year, because this policy was considered ineffective, counterproductive or dangerous and it was associated with the notion of central banks lacking the tools to manage the economy. Gold investors should always keep in mind that this notion may change some day, however, not likely in the nearest future.
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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