Ask anybody about why gold was in a bull market between 2002 and 2012, and they will most likely tell you that it was due to declining interest rates. Now, if you ask anybody if gold is even worth looking at as an investment, you’ll likely be told that it’s useless and does no good for an investor’s portfolio. The rationale given for this argument generally includes the sentiment that interest rates are going higher. But with this in mind, I believe one must really question if the trade in gold really is over and if interest rates are really moving higher.
Contrary to the popular belief, I think there’s still more room to the upside for the yellow metal.
Too many investors forget interest rates are still very low, and I will not be surprised if they stay here for much longer. Also, going forward, interest rates aren’t the only factor affecting gold prices. Investors have to pay close attention to other phenomena, such as demand and supply, inflation, and uncertainty.
Are Interest Rates Rising?
Since last year, I have been asking if interest rates really will be rising? As it stands, the Federal Reserve is the only major central bank that’s pressing on the idea of higher interest rates. And mind you, those higher interest rates would still be historically low.
Other central banks around the world have made it very clear: they don’t want or can’t afford to have higher interest rates. As a result, we are seeing rate cuts across the board, and it is surprising how many central banks are cutting back on their interest rates.
The European Central Bank (ECB) has an extraordinarily low interest rate policy in place and it is printing money. Japan has kept its interest rates low for a very long time, and it’s involved in printing as well. The Bank of England is keeping its interest rates low and the Bank of Canada has slashed its rates. Recently, we heard that the Reserve Bank of Australia lowered its interest rates 25 basis points, from 2.50% to 2.25%—the bank’s first rate cut since 2013.(1)
Looking at all this, it will be foolish to say interest rates are rising. In the U.S., maybe there’s a chance, but not elsewhere.
Other Factors Affecting Gold Prices
While low interest rates certainly help to drive gold prices higher, factors like demand and supply, inflation, and uncertainty play a major role as well.
Currently, from my point of view, demand for gold is keeping up, but the supply side is getting weak. This is a perfect recipe for higher prices ahead.
Consider this: in the U.S. alone, gold production from mines declined almost six percent in the first 10 months of 2014.(2) We will most likely see further deterioration in production at U.S. gold mines. Investors should also know that other major production regions are seeing scrutiny as well.
And when it comes to uncertainty, we see tons of it. Right now, there isn’t a clear indication to what will happen, not just in the U.S. economy as the Federal Reserve raises its benchmark interest rates, but in the global economy as well.
Inflation is still a concern in the long run.
Gold as Safe Haven
I don’t preach investors to be 100% in gold. If they do that, they are making a huge financial mistake. Diversification is very critical when it comes to long-term portfolio growth. But investors should consider holding some yellow metal in their portfolio or have some exposure to it through mining companies—10% to 15% is usually said to be ideal.
Investors should be looking at the precious metal as an insurance policy for their portfolios. It can benefit a lot when times are tough and the overall market is faced with rising risks and uncertainty. The yellow metal can really act as a safe haven in those times.