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Bullish Days Seen for Gold

The markets are on their toes lately, eagerly anticipating what the US Federal Reserve has to say about a brighter US economic outlook. Talks about reducing the $85 billion monthly bond-buying program will be finally put to rest as traders wait for the policy meeting at this month’s end. Of special concern is that in gold trading, where near-zero interest rates made it possible for an environment that has driven gold prices surging. This report will be of notable advantage to investors who venture in binary trading, as bullishness can therefore be expected amidst volatile times that gold futures is particularly facing as of late.

Higher Interest Rates: What It Could Mean For Gold Trading

When interest rates are low, gold is a strong investment tool.

As it is, we are seeing an increase of 1% in long term interest rates with the impending Quantitative Easing (QE) program reported to end any time soon. This is definitely one of the powerful factors that sent gold prices crashing. In 2012, gold was priced at $1,800 per ounce. Compare that to current 2013 prices, gold is valued at about $1,200 per ounce.

Rising interest rates have kept investors at their wits end. Quite understandably, their fears have risen from the confusing signals that the Federal Reserve is sending to market speculators. If it increases from less than 1% to about 3%-4%, gold supposedly becomes less attractive as a store of value and as a cash alternative.

The WGC Report

The World Gold Council (WGC) calls for a reality check on the sensitivity of gold prices to growing interest rates. It has recently released an investment outlook for gold that may dispel some of these fears. The WGC trade group stated that a moderate real interest rate environment between 0%-4% can be favorable to gold, being a precious metal that will still be relevant. In this environment, portfolio returns on gold can remain at 6%-7% and can enjoy less volatility even with near-zero rates.

Advancing rates may not be bearish for gold. There is even room for increase in the yellow metal’s market value. In periods of high interest, gold’s low volatility pushes it to become a desirable asset in an investment portfolio. When US real interest rates were from -1% to 3%, gold has shown a cumulative growth of almost 60%. This was evident between the periods of October 2003 and October 2006.

There seems to be a diminishing impact of increasing interest rates in relation to gold prices. The past few decades saw the global market expanding in such a way that the dynamics of supply and demand has become more diverse, with demand for gold shifting from the West to the Eastern countries. High demand from emerging markets and continuous economic growth has also exerted a positive spin on the purchasing power of consumers, which brought about structural changes in the gold market.

The WGC report concludes that rates above 4% present the least favorable return for a gold investor. Its latest “Gold Investor” report concludes: “Results from our analysis show that contrary to the simplistic view that high US real rates should lead to lower gold prices, moving to a moderate real estate environment promotes gold’s portfolio characteristics further. Returns in such an environment are in excess of the conservative return estimate used to provide evidence of gold’s portfolio contribution credentials.”

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