Gold shines at low real interest rates

Paris ( – Gold has reached its current all-time high of 1,413.12 Euro per ounce in September. And not only in Euro. Gold has reached historic highs in more than 30 international currencies, including Australian and Canadian dollars and many emerging market currencies, as Benjamin Louvet, Fund Manager Commodities at OFI Asset Management, writes in a recent market commentary.


But in US dollars, the troy ounce, which is currently quoted at 1,497.23 US dollars (as of 19 September), is still far from its record high of 1,908.79 US dollars in 2011. Many investors therefore wondered whether the move was still worthwhile, it continues.


“The outlook for gold is bright. As long as real interest rates are low, the gold price has the potential to rise further. If the US Federal Reserve were to cut key interest rates to zero – as many expect – the price of gold could even rise sharply again,” Louvet is convinced.


Gold would bring investors neither dividends nor interest. That was the most important reason why institutional investors did not invest in this asset class until a few years ago. Gold would not have covered their liabilities as part of their asset liability management. Instead, they would have invested in dividend shares or bonds, for example. However, the market situation had changed in the meantime: Today, there are negatively interest-bearing debt securities worth more than 17 trillion US dollars. And even some high-yield companies, which are considered high-risk, bury debt instruments with a negative interest rate, they say.


“In this low-interest market environment, gold is an attractive investment. In our view, this will not change much in the medium term. The central banks are already beginning to counter the impending recession with further interest rate cuts. After all, the major industrialized countries are all heavily indebted, which is why a rise in real interest rates would be unacceptable,” says Louvet. An example: France has a debt ratio of 100 percent of gross domestic product (GDP). If the real interest rate rose by only one percent, then the interest rate on this debt would also amount to one percent of French GDP, they say.


“Gold correlates strongly and negatively with the level of real interest rates. In other words, if real interest rates fall, gold will become more attractive,” Louvet says. There are three scenarios for this:


  • Inflation rises faster than the nominal interest rate
  • Because of an economic or financial crisis, central banks lowered interest rates faster than inflation rose.
  • Because of a political or geopolitical crisis, investors reduced their risk by selling shares and buying bonds – the demand for bonds drives the price and depresses their yield.


“Only if the economy recovers quickly and central banks are able to raise interest rates again would investors lose interest in gold,” Louvet said.