Gold’s 2016 demand outlook optimistic – WGC

Dec 17, 2015 - 3:30 PM GMT

The outlook for gold demand in 2016 remains optimistic despite the prospect of further rises in US interest rates, the World Gold Council (WGC) said in a report.

The US Federal Reserve decided to start to normalise US monetary policy after seven years of near-zero interest rates – it lifted the federal funds rate to 0.5 percent from 0.25 percent.

While this has strengthened the dollar, demand for gold in US dollar terms is not always the most relevant factor for most investors, the WGC said.

“In fact, our research shows that higher interest rates are not necessarily bad for gold,” it added

Physical demand for gold is global, it said, noting that more than 90 percent is from outside the US, primarily China and India.

In these economies, the local price matters most, the WGC said. In 2015, the non-US-dollar gold price has held up, even inching slightly higher.

“If there is a temporary downward impact of the price of gold due to a US rate rise then this could well lead to increased demand in price sensitive markets such as India and China,” the WGC said.

“We have already seen evidence in China via developments with the Shanghai Gold Exchange wanting to have gold traded in yuan and in India, the Indian gold trade expressing intent to establish a gold exchange,” it added..

The spot gold price was last at $1,051.70/1,052.10 per ounce, down $17.50 on Wednesday’s close.

Gold continues to play a very effective role as a hedge while stock valuations in the US and elsewhere remain elevated – investors have increased their risk exposure in search of returns amid a very-low-yield environment, the WGC also said.

And while there are some concerns about GDP growth across emerging markets, economic output continues to increase and so do incomes.

“This, in turn, strengthens the case for gold as a long-term strategic asset and wealth preservation tool,” it said.

Pro-gold schemes from the Indian government, efforts by the Shanghai Gold Exchange to open up the Chinese gold market to international investors, its plans to introduce a yuan-denominated gold pricing mechanism and the improving transparency of Chinese gold reserves “will continue to improve the market next year,” WGC head of market intelligence Alistair Hewitt said.

“Gold’s role as a portfolio diversifier, a wealth preservation tool and a tail risk hedge will continue to prevail due to expensive stock valuations and high liquidity risks. Finally gold’s cultural significance endures,” he added.

(Editing by Mark Shaw)