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Can Gold’s Bull Run Withstand Increased Interest Rates?

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Can Gold's Bull Run Withstand Increased Interest Rates?

Gold charts, with continued market confidence in the metal, have seen a price climb this year. 

All the uncertainty that formed during the build-up of, and the shock of the Brexit result, combined with negative interest rates have been the reasons behind the rise.

gold-1

As can be clearly viewed in the above gold chart, the price of gold this month has risen in a predicted trend.

The increase is linked to following reasons, to re-emphasize the causes mentioned above:

  • General global political and market unrest due to the world awaiting the Brexit results and the reaction following the decision.
  • Cheap central bank interest rates that are driving ROI (return on investments) down.

Consumer prices in the first world have remained consistently in the doldrums, despite injections from the government to boost the economy. 

Unless they rise soon, market investors will turn to gold as a sure bet for long-term sustainable growth and ROI. 

This outlook is causing the gold price to continue a seemingly relentless climb.

Investing in gold has always been seen as a comfortable hedge against inflation. 

This stance is not just one taken by the professional market investors, but is a common thread of thought in the lay public as well, especially more seasoned and mature armchair investment dabblers.

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According to recent analysis by TD Securities researching charts all the way back to the 1970s, gold has consistently gained an average of 24% every year during times of high inflation. 

Even though there was a slight dip last week in price, Gold futures once again rose to a further US$1.90 gain (+0.1%) giving it a price fixed at US$1328.40 a troy ounce on its Comex division at the New York Mercantile Exchange.

This winning streak is very much expected to continue according to investors and analysts. 

It is being bruited around the markets that this extended bull run on gold will lead to a continued high price settling.

With a glance at past reports from TD Securities below, the low-interest rates (in black) and the high prices of gold (in green) are proving the data they said. 

TD Securities show how high expectations of what possible interest rates on ten-year government bonds may set to be in future predicted influences the gold price.

gold-2

One of the analysts at Gabelli Gold Funds, Chris Mancini, states that a predicted bull market is forecast this year. 

He goes on to further say it will result in gold reaching its 2011 high that took the price of gold above US $1900 an ounce.

Other forecasts from analysts predict:

  • Gold could hit $1,425 this quarter according to ABN Amro Group NV
  • An average price of $1,350 could be recorded for this same period according to Commerzbank.
  • Capital Economics predict gold will be trading at $1,450 by the middle of next year.

There is one concern that has been left hanging in the air. 

What will be the outcome if inflation never arrives? 

During its last bull run, the gold prices were driven in part by expectations that are mirroring the attitudes now current: that inflation is predicted to rise. 

This drove the price peak of 2011 and inflation never arrived.

The interest rates of the First European Bank have just been cut to a minus -0.4% rate and approximately the equivalent of US $88 billion has been spent every month buying up corporate and government debt. 

Still, consumer-price inflation in the Euro currency zone stagnates at 0.1% reported in June. 

The region has been in a paralyzing state of deflation since December 2014.

This state is not expected to remain for long, and economists predict that inflation will rise. 

But this is not supposed to impact on consumer-price increases.

With a look at the analysts’ prediction below, who offered a 12-month price target for the Seven Group Holdings Ltd, they have set a median target of 5.26 in the share price forecast:

gold-3

The Group of Seven Holdings Ltd advanced economies consensus inflation forecasts predicts a rise of 1.8% for 2017 and a gradual snail pace climb to 1.9% by 2020. 

Share prices as reported above will show a likewise slow crawl up.

Two nations, that are considered key gold buying countries, are predicted to display inflation rises respectively of:

  • 2.9% for China and
  • 4.9% for India

The United States has historically followed a cautious path when it comes to rate increases

They are always linked to the failure of the current government in the voters’ minds and are guided by the governments’ need to keeping an eye on re-election. 

Academic analysts and more than a few business analysts, however, who were recently polled by the Wall Street Journal expect an increase in rates announced soon by the Federal Reserve.

It would follow then that the U.S. dollar would rise, and the dollar-linked metal would then become more expensive for the currencies of other countries. 

When gold is seen as less competitive, this will lead to an increase in the desirability in other avenues of investment like treasuries.

To see how closely the gold price is linked to the dollar, please look at the chart below:

gold-4

Despite doubts as to the viability of the high gold prices, both investors and the gold industry alike are having an outstanding year. 

The mining sector is perking up a bit in its wake and the third world gold producing countries are heaving a sigh of relief.

It is only to be hoped that the continued high prices do not deter the central long-term gold buying countries like India and China, who are the backbone of sustained gold price highs.

 

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