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    GSAM Connect 
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    August 5, 2015

    GSAM Connect | August 5, 2015

    Gold and Interest Rates: The Glitter’s Gone

    Only a few years ago, gold prices enjoyed an annual winning streak lasting more than a decade. As the Chart of the Week shows, gold’s spot price peaked in 2011, around the time that investors began considering the possibility of interest rate increases by the Federal Reserve.

    We believe that this timing is no coincidence.

    The chart compares spot gold prices with a measure of investor expectations of interest rate increases. The expectations measure ticked higher in July. At the same time, gold futures fell 6.7% in July, the biggest monthly decline since June 2013, as more investors began to anticipate action by the Federal Reserve (Fed) to raise interest rates for the first time in nearly a decade.

    EXHIBIT 1: AS RATE VIEWS INCREASED, GOLD’S PRICE WEAKENED

    Chart of the Week 07-31-15

    Chart Source: Bloomberg and GSAM as of July 2015. Market and Economic Summary Source: Bloomberg and GSAM. Key Economic Releases Source: Goldman Sachs Global Investment Research and Bloomberg. Please see end disclosures for definitions. Past performance does not guarantee future results, which may vary.

    Although influenced by a strengthening US Dollar and fears of weakening Chinese demand, we believe the prospect of potential interest rate increases has been key to gold’s price descent, which recently sent gold futures prices to a five-year low. Gold pays no dividends and has no earnings – so we believe rate pressures on gold should come as no surprise.

    We believe this perspective is worth noting, particularly as the Fed may be moving closer to raising rates. At the July 28-29 policy meeting, Fed officials unanimously kept the central bank’s benchmark interest rate near zero, touting an improving US labor market while also pointing to concerns about low inflation.

    The Fed has three more meetings remaining in 2015—September, October, and December—and Chairwoman Janet Yellen has said she expects to raise rates this year.

    Gold is sometimes owned because historically, at times, it has appreciated during periods of economic or market turmoil. Some investors may also view gold as a hedge against inflation. But in a period of rising interest rates, we believe gold may struggle.

    Topics: Interest Rates, Federal Reserve, Asset Class, Volatility, Commodities

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