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Interest Rates "Key" to 2014 Gold Price

Gold price rally "driven" by falling US bond yields. But $500 tag seen if rates hit 5%...
 
U.S. INTEREST RATES are "key" to the direction of the gold price in 2014, according to analysts and fund managers.
 
Historically, the gold price has "traditionally had a negative correlation with long-term US real interest rates," says Walter de Wet, head of commodities research in London for Standard Bank, moving higher when interest rates fall after accounting for inflation, and vice versa.
 
"A lower bond yield would imply a higher gold price," says de Wet. But further ahead, his colleagues at Standard Bank "continue to expect US bond yields to move higher towards year-end," with the 10-year Treasury bond falling in price until its yield rises a whole percentage from today, up to 3.75%.
 
Probably the most heavily traded government bond by maturity worldwide, 10-year US Treasuries have risen in price since the start of January. That has cut the annual yield – the rate of interest – which these fixed-income assets offer new buyers, pushing it down from 3.00% to 2.75% and below.
 
This drop in the 10-year US Treasury yield "has also translated into a lower real interest rate," says de Wet at Standard Bank, comparing the yield against the latest reported US rate of inflation.
 
Real interest rates are also "proxied" by the yield paid by 10-year inflation-linked US bonds, Standard Bank's analysis adds, noting that it "has dropped from just below 0.8% in December to the current 0.56%."
 
"Since the launch of the SPDR gold ETF in 2004," said a presentation last month from Claude Erb, a former commodities portfolio manager, pointing to a major vehicle for investment funds to gain gold-price exposure, "it seems that interest rates have driven the price of gold."
 
Identifying what he calls a "fear trade" linking bond and gold prices, on Erb's math the gold price "could fall to about $800 if interest rates rise to 4%...[and] $500 if interest rates rise to 5%."
 
Trevor Greetham, director of asset allocation and manager of Fidelity UK's multi-asset range, also believes interest rates are key to gold prices. 
 
"If you wind the clock forward," he tells Investment Week, and also without referencing inflation, " interest rates could be at 5% in a few years time.
 
"In that environment, people will question why they are holding gold, which does not yield anything."

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