Ghouls, gold & the real
rate of interest
Feb 18, 2007
FROM THE RUSSIAN INVASION of
Afghanistan in 1980 to the terrorist attacks of 9/11, any shock
event that sends the stock market lower seems to push gold prices
Black Monday in Oct. '87... the hedge-fund collapse of LTCM nine
years later... what's bad for stocks and bonds is good for gold.
That's why gold investors deserve their "ghoulish"
tag. We simply can't wait for Armageddon to hit, because we'll
get rich... just in time to get fried.
As with so much else, however, detailed research shows this to
be untrue. Over the 30-year period ending July 2003, in fact,
there was on average no significant correlation between the weekly
returns on gold and the weekly returns on stocks.
Not positive or negative. Simply none - or as near as damn it.
"This conclusion is consistent with previous research covering
more recent, shorter time periods," says Katharine Pulvermacher,
author of this detailed research on behalf of the World Gold
But the idea of gold rising when all other assets tumble isn't
entirely wrong, however. Gold really does move in the opposite
direction to paper securities. Armageddon notwithstanding, you
just need to bide your time.
Between 1994 and 2000, for instance - back when "irrational
exuberance" ruled on Wall Street, as Alan Greenspan, then
chairman of the US Fed, put it - gold sank 7.6% year-on-year.
An equal mix of US equities and bonds, on the other hand, would
have given you 10.7% returns each year on average.
Where should your money have been during the '90s? Not in gold,
that's for sure!
But this longer-term connexion linking the returns paid by gold
and paper securities works the other way, too. And between 1970
and 1980 - the last decade of runaway inflation in the developed
world - stocks and bonds lost 1.6% per year on average. Gold's
annual gains, meantime, averaged 19.9%.
How come? "Years of low return on risk capital go with years
of high returns on gold," as John Dizard of the Financial
Times put it. Or put another way, investment money floods into
gold when the alternatives fail to offer investors a decent return.
Risk doesn't even come into it, in fact. The real yield offered
by US government bonds - the safest debt you can buy according
to investment advisors and the rating agencies alike - shows
a marked relationship with returns on gold. Higher yields mean
lower gold prices. Lower yields invite gold prices to soar.
Source: St.Louis Fed, WGC (monthly averages)
Right now, real rates of return on government bonds stand near
multi-year lows for investors right across North America and
Europe. Are they likely to rise? The bond market certainly doesn't
Thirty-year US bond yields have actually dropped since the Fed
began raising its interest rates in June '05. They've fallen
by 0.3%. But inflation in the cost of living, at least according
to Washington, hasn't changed. So the real rate of return has
in fact fallen.
Looking again at that longer-term link between gold prices and
Wall Street assets we just saw, you should expect gold to keep
rising as real US interest rates remain low.
In the United Kingdom, it's the same story. The Bank of England
has hiked base rates 7 times since the summer of 2003. Twenty-year
gilt yields, however, haven't budged. Measured against official
inflation, in fact, they've dropped by one-half.
Do you trust Ben Bernanke or the Bank of England to raise the
real rate of interest anytime soon? If so, then gold isn't the
right investment for you.
But if you don't believe central bankers have any plans to reward
your cash savings with higher interest rates, then history says
gold should definitely figure in your portfolio today.
Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events - and must be verified elsewhere - should you choose to act on it.
Contact the author regarding this article.
Adrian Ash runs the research desk at BullionVault, the world's #1 private investor gold service. Formerly head of editorial at Fleet Street Publications - London's top publisher of financial advice for private investors - he was City correspondent for The Daily Reckoning for four years, and is now a regular contributor to 321gold, FinancialSense, GoldSeek, Prudent Bear, SafeHaven and Whiskey & Gunpowder among many other leading investment websites. Adrian's views on the Gold Market have been sought by leading news organizations including the Financial Times, Bloomberg and Der Stern in Germany.
© BullionVault 2006-2010