uploads///Gold versus Two and Ten Year Interest Rates

Gold, the Emergent Hero in 2016: Is It All Just a Sentiment Play?

Meera Shawn - Author

Nov. 20 2020, Updated 11:36 a.m. ET

Gold and US interest rates

Many analysts are comparing the current year’s performance of gold and silver to their performances in 2008. That’s an analytical mistake, to say the least. There was a boom in 2008, and there are quite a few similarities in Market dynamics between now and then. The amount of money flowing into the Market may also be similar. However, institutional players between 2008 and 2016 are different. In 2008, institutional interest was light. In the current scenario, there’s a massive influx of interest from institutional investors led by hedge funds and big banks.

Gold returns have been negative for the past three years. The most important phenomenon impacting gold has been the hike in the US interest rate. Now, constant speculation regarding the timing of the next rate hike is driving gold returns.

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Interest rates and gold prices are known to be inversely related. The higher the Treasury returns, the higher the probability that investors would switch to higher yield-bearing assets than the no-yield-bearing gold. In the graph below, you can see the performance of gold with two- and ten-year US interest rates.

Banks’ view on gold

With the rise in gold in 2016, there seems to be a shift in prices along with Market sentiment for gold. It became a money-saving haven amidst global turbulence. The choppy equity market and the oil market rout called for a safer place to invest money, and gold emerged as a hero.

Major banks such as HSBC, JPMorgan Chase, Bank of America Merrill Lynch, ABN Amro, UBS, and Deutsche Bank have also been favoring gold. However, Goldman Sachs has remained a naysayer for gold and has maintained a bearish outlook.

ETFs and mutual funds that are substantially impacted include the Sprott Gold Miners ETF (SGDM), the VanEck Vectors Gold Miners ETF (GDX), the First Eagle Gold Fund (SGGDX), the Gabelli Gold Fund (GLDAX), and the Fidelity Advisor Gold Fund (FGDIX).

In the next part of this series, we’ll see what the World Gold Council is advising on gold.


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