WGC: Gold price rises due to monetary policy failure

The rise in the price of gold is largely due to the loss of confidence in the monetary policy of central banks and government bonds. This is what the World Gold Council in a new report released earlier this week. Due to extremely low interest rates, investors have to take more risks in order to make a return, risks that they try to hedge by keeping a larger portion of their assets in gold.

The price of gold has risen by almost 30% in the first half of this year, the largest price increase since the European debt crisis of 2010 and 2011. And this year, it's not the high levels of sovereign debt that worry investors, but the actions of all the major central banks.

For example, the Federal Reserve postponed its long-awaited interest rate hike, the Bank of Japan introduced negative interest rates and the ECB further expanded its stimulus program to €80 billion per month. The Bank of England could not be left behind and cut interest rates to 0.25% this week. The central bank is also pumping billions into the economy.

Monetary policy pushes gold prices up further

Savers and investors doubt the effectiveness of these stimulus programs and seek refuge in safe havens. Due to the extremely low interest rates, buying gold is becoming increasingly interesting as an alternative to saving or investing, according to the World Gold Council. At the moment, 40% of all government bonds of countries with a good credit rating already have negative interest rates, making it increasingly difficult to achieve a good return.

Analysts from several banks also believe that the Gold price will continue to rise in the coming period due to the accommodative monetary policy of central banks. UBS and ABN Amro expect a price of more than $1,400 per troy ounce, while Credit Suisse, Bank of America and the Royal Bank of Canada even put a price target of $1,500 on the precious metal.

Investors are getting back into gold (Source: World Gold Council)

Negative correlation

Gold is interesting not only because of the negative interest rates on government bonds, but also because of its negative correlation with many other asset classes. That means gold usually moves in a different direction than stocks, bonds, and commodities. In this way, gold contributes to reducing the risk in a well-diversified investment portfolio.