Gold: investor views on the price drivers

A third of gold and silver investors think interest rates will have the biggest effect on the price of precious metals in the second half of 2014

A third of gold and silver investors think monetary policy will have the biggest effect on gold prices in the second-half of 2014, with geopolitics in second place.

These two factors beat inflation, which came in fourth place, alongside the direction of the stock market.

BullionVault the physical gold and silver exchange online, asked its users in July what they thought most impacted the price of gold. With the Bank of England expected to hold interest rates at 0.5% for the foreseeable future, 33% of respondents believe monetary policy will have the biggest influence. However historical data shows that there is no constant relationship between interest rates and UK gold prices.

Accounting for inflation, the real price of gold has moved in the opposite direction to Bank of England interest rates only half the time (49%) since 1974. Even accounting for inflation, gold’s real change has averaged a 2.4% annual gain when the Bank of England is raising rates. When the Bank of England interest rate is falling, in contrast, gold has risen 69% of the time, averaging a real annual gain of 4.4%.

Nearly one in five BullionVault investors (18%) believes geo-political factors have the most influence on the price of gold; therefore they may be keeping a close eye on current world affairs such as Russia and the Middle East. However, history shows that any peaks on the back of world events are short lived.

Adrian Ash, Head of Research at BullionVault said: “Gold’s famous peak at $850 per ounce in 1980 came when the Soviet Union invaded Afghanistan and also coincided with the Iranian hostage crisis at the US Embassy in Tehran in 1980. But while speculators trading gold futures and options do move the price by raising their betting on breaking news, such moves tend to be brief.”

What do investors believe moves gold price?

 

Monetary Policy (for example, interest rates, US Fed tapering) 33%
Geopolitical factors 18%
Trading in gold/ silver derivatives 15%
Inflation in consumer price index 14%
Direction of world stock markets 14%
Indian demand 3%
Chinese demand 3%
Central Bank demand 1%

The survey also found one in seven BullionVault investors (14%) believe inflation in the consumer price index has the biggest part to play in effecting the price of gold, and similarly 14% believe that the direction of stock markets is the most significant factor. However, over the last 40 years the gold price and the RPI index have shown zero correlation, with gold moving higher or lower in sync with changes in the rate of inflation only 47% of the time. Gold priced in Sterling meantime moves in the opposite direction to the FTSE All-Share index just less than half of the time, around 49% of all twelve month periods since January 1974.

A small 3% thought Indian demand had the most effect on gold price but data shows that Asian demand tends to follow prices rather than setting them. In fact in spring 2013 when prices crashed to a three-year low India was importing record quantities of gold.

Adrian Ash, Head of Research at BullionVault said:“What influences the price of gold is a combination of many different factors. At their root, long-term rises or falls in the gold price reflect a broader anxiety about politics, the value of money or the outlook for other assets.

“For many investors gold is a form of financial insurance. When there is civil or world unrest, gold could be seen as an insurance policy to have; and the cost of insurance is of course much higher when you need it.”

 

 

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