New report urges investors not to overestimate the effect US interest rate rises may have on gold in their portfolio

NEW YORK (July 31)  The World Gold Council has today released its latest quarterly investment journal, Gold Investor, which includes the research paper "Gold and US interest rates: a reality check". The paper analyses the impact on the gold market of higher interest rates, as financial markets factor in the impact any decision by the US Federal Reserve to wind down QE and tighten monetary policy might have. Its conclusion is that, while negative interest rates support gold investment demand and rising rates increase the cost of investing in it, a normal rate environment - with real interest rates ranging between 0% and 4% or approximately 2.5% to 6.5% in nominal terms - is not automatically adverse to gold. In such a rate environment, gold's inclusion in a portfolio has historically been beneficial to investors.

The analysis shows that in a normal real rate environment:

-- Returns for gold are in line with the long term average of an annualised 6-7%. -- Volatility is significantly lower than during very high or low real rate environments. -- Correlation between gold and global equities is slightly negative, in line with its long-term average correlation of zero.

Additionally, the impact of US real rates on the gold price appears to have reduced in significance. Although the US market can lead investor behaviour in the short term, the gold market has become more diverse in both sectors and geographies in recent years. The long-term performance of gold is not solely tied to US sentiment and behaviour. Emerging markets are now increasingly driving the long term view of gold. US physical demand for gold (including ETFs) accounts for less than 10% of the market, while emerging markets make up close to 70% of annual demand.