US Rate Hikes Not Necessarily Bad For Gold – WGC Year-End Gold Report

By Paul Ploumis (ScrapMonster Author)

December 17, 2015 04:41:19 AM

(Kitco News) - Despite an expected new U.S. interest rate-hike cycle, which many expect to weigh on gold prices, the World Gold Council says they remain optimistic for the yellow metal in a tightening environment next year.

“[O]ur research shows that higher interest rates are not necessarily bad for gold,” the organization said in its year-end gold market commentary Wednesday.

The Federal Open Market Committee raised interest rates in the U.S. by 25 basis points Wednesday, as markets expected. Higher rates in the country are expected to boost the U.S. dollar, which would pressure gold prices. February comex gold futures rose on the news and were last quoted up $9.80 at $1,070.80 an ounce.

“Whilst the US dollar price is one driver of gold demand it is not always the most relevant factor for most investors,” the firm said.

According to the report, more than 90% of physical gold demand comes primarily from Asian economies – particularly China and India – and therefore should benefit from a stronger U.S. dollar.

“In these economies local price matters most – and in 2015 the non-US dollar gold price has held up, even inching slightly higher,” the WGC said, adding that if there is a temporary downward impact on the gold price due to the U.S. rate hike, “this could well lead to increased demand in price sensitive markets such as India and China.”

Aside from a stronger U.S. dollar, many concerns among gold investors this past year have been weak investor sentiment and the non-yielding nature of gold. However, the WGC is not too concerned.

“Gold continues to play a very effective role as a hedge, as stock valuations in the US and elsewhere remain elevated, as investors have increased their risk exposure in search of returns amid a very low yield environment,” the firm explained.

“While there are some concerns about GDP growth across emerging markets, economic output continues to increase and so do incomes – this, in turn, strengthens the case for gold as a long-term strategic asset and wealth preservation tool,” the WGC continued.

The WGC also highlighted the fact that 2016 should also usher in further developments in key Asian markets that will support gold prices, like more pro-gold schemes and maybe even a gold exchange in India.

“Following the launch of the International Board by the Shanghai Gold Exchange (SGE) to open up the Chinese gold market to international investors, SGE’s plans to introduce a yuan-denominated gold pricing mechanism to facilitate regional market trading are also likely to take shape in 2016,” the WGC noted.

“Against this backdrop, the outlook for gold demand in 2016 remains optimistic.”

U.S. Rate Hikes

Specifically on the topic of U.S. rate hikes, the WGC’s director of investment research, Juan Carlos Artigas, said that despite the gold’s price volatility post-Fed, the metal’s role as a strategic investment is as important as ever for multiple reasons.

According to Artigas, the rate rise has already been priced in and it is not a dominant driver.

“By now, the bulk of the rate hike has likely been incorporated into the price of gold. We expect the Fed to take a measured approach to increasing interest rates and don’t anticipate consecutive rate hikes in the near future,” he explained.

“The interconnectedness of global financial markets has resulted in a higher frequency and larger magnitude of systemic risks. Stock valuations are at multi-decade highs, investors have been increasing their risk exposure in search for returns amid a very low yield environment. As a high-quality liquidity asset, gold can help investors balance the risk in their portfolio and reduce losses during tail events,” he added.

Courtesy: Kitco News