Gold shining amid low interest rates
New York (Aug 17) Gold and stocks are supposed to move in opposite directions as investors turn to safety assets when the financial market is turbulent. Lately, however, gold is continuing rising along with stocks. Analysts expect gold to rise further due to ultra-low interest rates.
"Gold used to shine amid unstable financial market conditions when demand for safety assets increased," said Oh On-su, an analyst at Hyundai Securities. "It is a means of hedging against risks."
Gold prices have risen 28 percent this year, though the financial market has been stable and the stock market is bullish. New York stocks marked a record high. Oh cited negative interest rates to explain the phenomenon.
"Central banks in advanced countries have been adopting negative rates as their economies aren't responding quickly to quantitative easing. Bond yields are falling as a result, and institutional investors are in a dilemma in which holding bonds lead to losses," Oh said, explaining why investors are turning to gold.
Lee Su-jeong, an analyst at Meritz Securities, said that the joint rally of gold and stocks shows that global stocks are "in fact climbing the wall of worry, since the investment in gold basically stems from worry."
She pointed out that the current rally in the United States is called "the most hated bull market ever." Though stock market indexes are rising, the market participants' preference for stocks is low.
She also said that negative interest rates pulled up gold prices. "Especially after the negative interest rate policy by the Bank of Japan, distrust of central banks increased, which came to highlight gold as a means of storing value."
She said gold prices aren't likely to fall for some time, pointing out that they are in negative correlation with real interest rates.
"The point is that the real interest rate is unlikely to recover for some time," she said. "The U.S. Fed is expected to be cautious about key rate hikes until the end of the year, and the U.K. is likely to cut its key rate. The eurozone and Japan will also continue with monetary easing policies. Real inflation will remain in minus territory for some time. Hence, the rally of stocks and the gold rush can continue until November, at least."
Kim Hun-gil, an analyst at Hana Financial Investment, said as asset prices are sustained by liquidity amid still sluggish global demand, the market can fluctuate anytime. "In that case, gold prices may rise over 10 percent from the current price, reaching $1,500 per ounce."
Oh said the strengthening of the dollar may work as a burden for further rises in gold price.
"The recent rise of gold reflects the weak dollar following Brexit. As the dollar is showing signs of strengthening amid the increasing possibility of a U.S. key rate hike within this year, the gold rally may take a break for the short term."