Last week, the World Gold Council (WGC) released a market update entitled “Failed Monetary Policies Lift Gold”. What are the main conclusions of the report?
The price of gold rose by almost 29 percent year to date (as of August 2, 2016). It has been gold’s largest continuous gain since the European sovereign debt crisis in 2010 and 2011. As a result, gold has been one of the best performing assets so far this year, outpacing all major benchmark indices. According to the WGC, that excellent performance was driven in part by ineffective monetary policies. Investors began to lose confidence in the effectiveness of unconventional monetary policies, so they use gold to hedge their portfolios.
Mike Shedlock has recently expressed a similar opinion. According to him, the price of gold is driven to a large extent by faith that central banks have everything under control. As central banks have made little or no progress on their stated goals, markets are again questioning the central banks’ ability to keep things under control.
Although the Bank of Japan announced an expansion of its quantitative easing policies, many investors were disappointed, as the market was anticipating larger increases of asset purchases and/or further rate cuts. And global bond yields remain stubbornly low. The WGC believes that lower opportunity costs and a more limited set of investable assets (many sovereign bonds either sits on central bank balance sheets or yield negative rates) have notably increased the lure of gold this year. Moreover, in the environment of ultra low interest rates investors have to accept much more risk. Therefore, they also demand more gold as a hedge against risky assets they have to add to their portfolios to earn positive returns.
Summing up, the WGC released a new market update last week, in which it argues that the rally in gold prices in 2016 was driven in part by the diminished faith in monetary policies. We agree with such an opinion, as we see the yellow metal as the ultimate safe-haven. When the global economy blooms and the international monetary system seems to be solid, the demand for gold is limited. But when problems emerge and faith that central banks have everything under control vanishes, gold shines. The reason behind it is the uncomfortable truth that our fiat currencies are based only on faith – when there’s a shortage of it, investors recall that good old gold served as money for thousands years.
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.