World Gold Council report debunks popular “truths” on gold

A new report takes on some of the conventional wisdom relating to the price of gold, and what the current economy means for it.

New analysis from the World Gold Council (WGC) has revealed that some commonly accepted ‘truths’ regarding gold’s relation to the dollar aren’t quite as accurate as some believe. The WGC report, from director of Investment Research Juan Carlos Artigas, particularly debunks two beliefs that gold skeptics have focused on in recent times: (1) That gold grows weaker as the dollar grows stronger and (2) that increases in U.S. interest rates have an adverse effect on the value of gold.

Artigas believes that blindly accepting the so-called wisdom ignores the actual performance of gold. Regarding gold’s perceived weakness in the face of the dollar’s rise, the analysis points out that there have been times throughout history when the dollar was strong, yet the price of gold also increased.

The point is simple: Gold’s relationship with a strong dollar is unpredictable and includes a number of factors that are often overlooked. The report also notes gold’s recent increase in price in currencies other than the dollar, which has been further heightened as the current strength of the dollar has diminished the relative value of others.

As for the belief that higher interest rates negatively affect the price of gold, Lawrence Williams notes, “While most of these bank analysts look on the Fed raising interest rates as an adverse factor for gold, they totally ignore the fact that monetary tightening might lead to weakness in the general equity markets.” He also adds that vulnerability in these markets can increase investors’ demand for gold as value storage.

Artigas stresses that the relation between interest rates and gold is more complex than most understand, and that the existing conventional wisdom is only partially true. For example, he notes that rising interest rates generally only affect gold as an investment. However, gold demand comes in many other forms, including the production of jewelry and technology. For these markets, demand for gold can rise during periods of higher rates, as they are primarily driven by economic growth and consumer spending.

The other issue Artigas has with the “high interest rates are bad for gold” mentality is that it stems from analysis done several decades ago. Since then, the economy has changed significantly – as has the gold market – making this theory somewhat outdated.

Williams notes that even if the Federal Reserve were to increase interest rates, it will be small until they can “weigh up how such a move might affect the U.S. economy.” He also adds that real interest rates could stay negative and thereby not have an impact on gold’s price.

Regardless of the effect that the dollar’s spike and a rise in U.S. interest rates could have on gold, in his report, Artigas remains confident that the precious metal will retain its status as a popular way to diversify one’s savings.

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photo credit: Cancer Institute of Columbia. via photopin (license)