Higher interest rates do not necessarily have a negative effect on the gold price

In a recent study, the World Gold Council (WGC) has looked into the question of how higher interest rates would influence the gold price. The current zero interest rate policy in the euro zone and other countries such as the US has led to negative real interest rates in several economies – an ideal prerequisite for rising gold prices. However, for several months now, markets have been waiting for an increase in the US base rate by the Fed, which has been postponed time and again, yet seems more and more likely. According to WGC analysis, increasing real interest rates up to a level of 4 per cent would not prevent positive average gold returns. The reason for this seemingly illogical assumption is as simple as it is obvious: in the face of the current crises on the world markets, gold price dips caused by interest rate increases would lead to significantly stronger demand for gold, with gold prices rising as a consequence. There are various indicators for an increase in demand for gold by both consumers and investors as well as central banks. In the third quarter of 2015, when the US gold price dropped briefly by 7 per cent, strong demand for gold bars, gold coins and jewellery was immediately triggered. At the same time, purchases of gold-based ETFs increased, with no corresponding redemptions to date. Since there are various indications that investors have been holding off gold purchases in previous months, a more favourable gold price level may well trigger an increase in demand. In addition, many central banks are still interested in expanding their gold reserves. A dip in the gold price would present an excellent opportunity to do that.