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Rising U.S. interest rates may not be bearish for gold: report
July 31, 2013 / 11:09 AM / in 4 years

Rising U.S. interest rates may not be bearish for gold: report

Gold ingots of 999 purity, used for the production of gold medals for the 2014 Winter Olympic Games in Sochi, are seen at the Adamas jewellery factory in Moscow, June 28, 2013. REUTERS/Sergei Karpukhin

NEW YORK (Reuters) - The price of gold has room to increase even if U.S. interest rates keep rising as an improving economy should boost demand by jewelers and manufacturers, a report by the World Gold Council trade group said on Wednesday.

A brighter U.S. economic outlook has put the Federal Reserve on a path to reduce its $85 billion monthly bond-buying program. The Fed is set to release its policy statement from its July meeting later on Wednesday.

There is growing fear among gold investors that the scaling back of U.S. monetary stimulus will spark a surge in borrowing costs, making gold - which pays no dividend or interest - particularly sensitive to rising interest rates.

However, with emerging markets accounting for about three-quarters of gold demand yearly, higher U.S. interest rates may have less influence on gold prices than expected, according to WGC’s latest “Gold Investor” report.

WGC is funded by the global gold mining industry to market the precious metal.

“Gold is not only a store of wealth but it is also bought around the world in periods of higher income growth as we have seen in emerging markets,” said Juan Carlos Artigas, WGC’s head of investment research.

Between October 2003 and October 2006, gold posted a cumulative return of almost 60 percent when U.S. real interest rates jumped from -1 percent to 3 percent, the report showed.

During periods of rising U.S. interest rates, gold’s relative low volatility also makes it a desirable asset in an investment portfolio, Artigas said.

In addition, the influence of U.S. interest rates on gold has diminished over time with the emergence of the top bullion-buying countries such as China and India as the market has become more global, Artigas said.

Gold is down about 21 percent year to date, as a lack of U.S. inflation and possible withdrawal of monetary stimulus by the Fed threaten to put an end to the yellow metal’s 12-year bull run.

Editing by Nick Zieminski

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