Gold is going to benefit from a further move of real interest rates into negative territory. There is a long-standing inverse correlation between real interest rates and the price of gold. The Fed has clearly signaled that it will take its eye off its 2% inflation target.
Gold no longer has a legal role in the world’s monetary system, but because of a collapse of faith in sovereign obligations and a coming complete lack of trust in governments and financial institutions, gold is going to quickly become a core banking asset.
Since the 2008 financial panic, central banks in the US, UK, Europe, and Japan have experimented with the aggressive use of their balance sheets to stabilize their financial markets and encourage a return to higher rates of economic activity.
The key problem would be at what price of gold would the United States peg its currency. Great Britain returned to the gold standard in 1925, after going off it in 1914, at the 1914 peg price. This was a mistake made by Winston Churchill which he called it the biggest he ever made.
The two largest gold buyers in the world that largely drive the Love Trade, China and India, underwhelmed the metals market with their subdued demand for the yellow metal during the second quarter of this year.
The metals markets opened to the downside for the midweek session this morning. A 0.28% advance in the US dollar and a 0.36% slip in crude oil contributed to early selling pressure. Spot gold prices dipped under Tuesday’s lows and touched $1,588 per ounce.
From what we see, central banks have been scared into holding gold since the onset of the financial crisis. Beyond that, we don’t see an active strategy at the ECB to keep its gold reserves at 15% of total assets.