Global central banks have shown that they are willing to adopt negative interest rate policies to stimulate stagnate growth. Consequently, in this new so-called NIRP environment, gold exchange traded funds could continue to shine.
Given the ongoing NIRP environment, with European and Japanese central banks cutting benchmark rates deeper into the red to promote growth, the World Gold Council believes investors may turn to gold bullion as a more stable store of wealth.
“History shows that, in periods of low rates, gold returns are typically more than double their long-term average,” according to a recent World Gold Council research note.
With government bonds depressed due to the negative yield environment, fixed-income assets would be less effective at hedging market risks and may appear overbought in some areas – about 30% of high quality sovereign debt, or over $8 trillion, is trading with a negative yield and almost an additional 40% with yields below 1%, according to the World Gold Council.
Consequently, portfolio analysis suggests that investors should utilize alternative hedging tools, such as gold, in a low-rate environment, especially among pension funds and foreign reserve managers whose investment guidelines are stricter or retail investors with lower risk tolerance.[related_stories]
“We believe that, over the long run, NIRP may result in structurally higher demand for gold from central banks and investors alike,” the World Gold Council added.
Gold is already seeing a surge in interest. For instance, the SPDR Gold Shares (NYSEArca: GLD) has been the most popular trade so far this year, attracting $5.1 billion in net inflows year-to-date, according to ETF.com.
Gold-related exchange traded products have seen greater interest on the rebound in gold prices this year, accumulating over 330 tons of gold worldwide on the increased demand. Gold futures have increased to $1,222 per ounce, with GLD rising 16.0% year-to-date, as investors sought the relative safety of the hard asset and used gold bullion to hedge against weakening currencies.
Moreover, we are seeing increased central bank demand after the lackluster performance in precious metals in prior years. Central banks accumulated net purchases of gold of 483 tons in 2015, the second highest annual total since the end of the gold standard, reports Emiko Terazono for the Financial Times.
Among the top gold hoarders of 2015, Russia was the largest buyer of gold for the fourth consecutive year, raising ownership by 206 tons as the country diversifies its depreciating ruble currency. Meanwhile, China, whose currency will be added to IMF’s reserve currency basket, announced its first increase in gold holdings since 2009, acquiring 104 tons int eh second half of the year to 1,742 tons.
“we believe that the prolonged presence of low (and now even negative) rates has fundamentally altered the way investors should think about risk and may result in a broader use of assets like gold to manage their portfolios more effectively and preserve their wealth over the long run,” the World Gold Council said.
SPDR Gold Shares