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What drives the Gold price?

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    What drives the Gold price?

    Dear James,

    I have learned so much more about the workings of the stock market since I became a member of MM. Thank you. Gold : I have copied and pasted a quote from a Morningstar article written by Holly Black, February 20. “ When inflation equals or exceeds interest rates, golds investment attractiveness increases. This is because gold is seen as safe, physical store of value, protecting investors’ money in times of uncertainty. Conversely, when investors are more risk-on and interest rates are high, gold effectively losses money because it cannot pay an income or grow”. So this means when interest rates exceed inflation, the gold price can be expected to come down. What’s your view on the future of interest rates and inflation, and the gold price? Should we be looking at U.S. statistics only?

    Thanks

    Raj

    Answer

    Hi Raj,

    There are a number of moving parts to this equation. What you have mentioned plays into it however the links to low rates (or negative real rates) is more about cost of carry. If interest rates are at say 5%, that creates a higher cost of holding gold. When rates are low, the cost of holding gold is equally low. I would also throw in different countries attitude to their gold reserves which influences supply & demand, the $US and alternative inflation hedges such as Bitcoin.

    Generally speaking lower interest rates are indeed good for gold but that wasn’t the case between 2000 and 2010. Again as you mentioned inflation plays an influential part in the gold price but we do believe all pieces of the puzzle should be considered and as precious metals have a tendency to follow multi-year trends don’t be afraid to simply go with the proverbial flow.

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    Gold ($US/oz) v RBA Cash Rate
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