Negative Interest Rates Good For The Price Of Gold

Negative interest rates are having a positive impact on gold prices, according to trade body The World Gold Council.

Statistics show that gold prices have surged by 16% since the European Central Bank and the Bank of Japan cut some interest rates to below zero.

Policymakers see negative rates as tools for controlling pressure within the economy leading to deflation and a way of devaluing currencies.

The council argues negative interest rates are good for investors holding gold.

Historically, returns on investment during negative rate terms are double those at other times and investors should increase their gold holdings to take advantage of this, argues the council.

Four reasons to buy gold now

The council also expects a mini gold rush sparked by negative interest rates because of four main factors:

  • The cost of holding gold decreases
  • Fund managers and investors hold more gold in portfolios as a hedge against low interest rates
  • Negative rates discourage investment in many currencies
  • Negative rates can push stock markets into more uncertainty and volatility

In a market update report, the council explains the global economy has entered a new phase of monetary policy.

Unprecedented economic policy

“No one knows what is going to happen because these are uncharted waters and unprecedented actions,” said a spokesman for the council.

“The side effects are discouraging with the coming of currency wars, market uncertainty and unstable asset inflation.”

One clue of where the price of gold may be going is that central banks are buying more of the precious metal.

Forbes magazine reports that central banks ended 2015 with an additional 483 tonnes of gold stashed in their vaults, with Russia and China buying the most.

Between them, the two countries are sitting on a stockpile of more than 3,000 tonnes of gold.

The magazine suggests central banks influence the gold market because investors follow their lead and as the largest holders of gold, the decisions the banks make about buying or selling gold are also watched by the markets.

“If a big investor is buying and the central banks are, the likelihood is the trend is the price is probably going to go up rather than down,” said the author of the piece, Tim Treadgold.