As stock prices struggle to add to their impressive summer gains, gold has awoken from a slumber of several months. Its recent upward move has brought year-to-date gains close to 17 per cent, and the price of the precious metal is now within 6 per cent of the record high set during last autumn.
Could policymakers' latest efforts to return the global economy to a more familiar growth trajectory signal the beginning of the latest phase in gold's bull market, now lasting over a decade?
The latest stimulus measures, and the accompanying expansion of the monetary base, may do little but prevent growth from falling too far below potential in the respective economic jurisdictions and thus have no discernible impact on inflationary pressures. However, investors should recognise that the need for continued near-zero interest rates across most of the advanced world, not to mention round after round of unconventional monetary operations simply to keep unstable dynamics from taking hold, is uniformly positive for gold.
The latest stimulus measures, and the accompanying expansion of the monetary base, may do little but prevent growth from falling too far below potential in the respective economic jurisdictions and thus have no discernible impact on inflationary pressures. However, investors should recognise that the need for continued near-zero interest rates across most of the advanced world, not to mention round after round of unconventional monetary operations simply to keep unstable dynamics from taking hold, is uniformly positive for gold.
Gold is a monetary asset and competes directly with the world's leading currencies, most notably the dollar, euro and yen. The precious metal is typically described as a non-income-earning asset despite the existence of an active lending market, which means that it is established convention to compare returns expected from the precious metal with those available from investing currencies in short-term monetary instruments.
Needless to say, the opportunity cost of holding gold declines as real interest rates fall and, as a result, the precious metal's relative appeal as an investment asset rises. High real interest rates of close to 4 per cent during the 1980s and 1990s were an important factor behind the protracted bear market that struck gold bugs over the period.
Conversely, negative real interest rates through the 1970s went a long way in explaining the precious metal's stellar performance in that decade.
Needless to say, the opportunity cost of holding gold declines as real interest rates fall and, as a result, the precious metal's relative appeal as an investment asset rises. High real interest rates of close to 4 per cent during the 1980s and 1990s were an important factor behind the protracted bear market that struck gold bugs over the period.
Conversely, negative real interest rates through the 1970s went a long way in explaining the precious metal's stellar performance in that decade.
Fast forward to today. Near-zero interest rates across most of the Western world, alongside an inflation target of 2 per cent in most jurisdictions, mean the monetary environment has rarely looked more favourable for gold. The structural headwinds to robust economic growth, not to mention central bank rhetoric, virtually assure negative real short-term policy rates for many years to come. As a result, it is highly unlikely that the bull market in gold is set to end in the immediate future. ...
Gold's upward march has resumed, and the precious metal is on the verge of an important break-out. Investors should take note.
Gold's upward march has resumed, and the precious metal is on the verge of an important break-out. Investors should take note.
More information can be found online at http://www.goldbullionadvisors.com
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