What do Carney’s targets mean for British gold investors?

When the Bank of England released its inflation report in July, it did so with forward guidance of 2.5% consumer price inflation and 7% unemployment rate. The unemployment rate is currently at 7.8%.

At the press conference, following the release of the report, Carney made it clear that unemployment is now a key target of the MPC, “until the unemployment threshold is reached, and subject to maintaining price and financial stability, the MPC intends not to reduce the stock of asset purchases financed by the issuance of central bank reserves.”

As we reported at the time, Mark Carney delivered his first keynote speech last week and gave ‘reassurance’ that even if unemployment falls below 7% it is merely a “staging post along the road to recovery. Unemployment must fall below this post before the MPC will even begin “to consider whether to raise the bank rate.”

We concluded that Carney’s rescue remedy for the British economy was reckless for savers causing them to turn to alternative assets. In fact, we said it is so bad that Carney is practically encouraging gold investment. Not only are savers experiencing negative real interest rates but the value of their cash is being eroded.

Given gold is often referred to as a hedge against central banks’ policy decisions, we thought it would be worth looking into how the gold price correlates to any changes in their key targets.

Prior to Mark Carney’s arrival we ‘merely’ had to consider how the change in interest rates would affect our savings and our gold investments.

The annual change in the real rate of interest over the last thirty years has ranged between -3.1% and 4.5%. In contrast the percentage change in the gold price has ranged from -18% to 35% from year to year. 

Looking at just U.K. based data, i.e. our real rates of interest vs. the sterling gold price we find that there is little correlation prior to 2009. For instance, 1997 and 1981 saw the biggest annual decline in the gold price in the period studied, however the real rates of interest were average compared to the rest of the data set.

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