Gold prices are sliding as investors look to move their money to take advantage of a hike in US interest rates later this year.
Gold for December delivery has lost more than 3% of value – the biggest drop since December 2013.
At US$1,265 an ounce, the price has rebounded a little but is still down on the $1,350 an ounce price of a month ago.
To try to stem the flow of money out of gold, trade body The World Gold Council is arguing that higher interest rates may not result in a lower gold price.
“A shift in monetary policy need not signal lower gold prices,” said a spokesman. “Although negative nominal rates are unprecedented, there are many historical precedents for negative real rates.”
The council explains that gold returns are double long-term averages when rates are negative; as long as they are no higher than 4%, gold performs better and although falling rates are linked to higher gold prices, the reverse is not necessarily true.
Besides the US Federal Reserve’s likely pulling up of official interest rates expected before Christmas 2016, another measure causing concern for investors is speculation the European Central Bank will axe a massive asset purchase program.
Despite the rumours, the ECB has not announced any such action.
Historically, investors have looked to gold in times of economic and political instability when the price has held and the precious metal is more liquid than other assets.
However, gold is an asset that pays no income and loses value as inflation increases. For many, this makes gold an empty asset.
Exploitation of uncertainty
The World Gold Council is trying to bolster the price by exploiting that investors should play safe in times of uncertainty.
“Looking forward, we believe the price dip will offer a good buying opportunity for consumers and long-term investors. In addition, even though central banks may start to normalise monetary policies, such a prolonged period of extraordinary measures has led to a structural shift in asset allocation that will linger much longer,” said the spokesman.
“In this new normal of lower returns and higher uncertainty, gold has an important role to play in the portfolios of investors large and small.”