The price of gold bottomed on October 5 at $1,195 per troy ounce (London PM).
Since then, the metal has been strong, up 3%.
Triggers behind the recent performance of gold include concern about Ebola, risks associated with a recession out of Europe, and overall concern about the health of the global economy.
With the recent concerns as the backdrop, what will central banks likely do over the remainder of 2014 that could affect the price of gold?
The following figure depicts what central banks have done with their respective policy interest rates over the past 25 years (left figure) and recently (right figure).
What is abundantly clear is that central banks have developed a clear downward bias in their attempts to manipulate market interest rates. The dotted trend lines for each graph show this.
The tendency to keep rates low is also readily apparent in recent actions of central bankers.
Here is a list of recent central bankers‘ actions over the past month.
- Denmark reduces its rate to -0.05%;
- Chile lowers its rate to 3.25%;
- Peru reduces its rate to 3.50%;
- China lowers its repo rate;
- Romania reduces its rate to 3.00%;
- Poland lowers its rate by 50 basis points; and
- South Korea reduces its rate to 2%.
With central bankers now exhibiting a strong tendency towards monetary policy accommodation (i.e. low rates), what does this mean for gold?
Presuming central bankers do not attempt to switch course by the end of the year – a highly reliable assumption – it likely means that gold will benefit on two fronts.
First, by voicing concern and acting on those concerns, central banks are sending the signal that the global economy is weak, a strong price signal for gold investors.
Second, continued lower rates raises the risk of long-term inflation. The most well-known hedge against profligate central bankers is gold.
Overall, the remainder of 2014 looks good for holders of gold.
The CC Holdings Group ( https://www.suissegold.com ) is headquartered in the United Kingdom, and provides clients with financial services including physical bullion, deliverable foreign exchange, custody and payment services.
This information is intended to assist investors. The information does not constitute investment advice or an offer to invest or to provide investment services and is subject to correction, completion and amendment without notice.