A New Role For Gold In A Post-QE World

July 10, 2015

With debt-laden Greece’s place in the eurozone hanging in the balance, and China’s stock market rally of the past year now looking like a deflating bubble, you’d think gold prices would be soaring as investors look to cut portfolio risks. But gold isn’t spiking.

Prices of the SPDR Gold Shares (GLD | A-100), the world’s first and biggest gold ETF, have been remarkably stable in the past week and, for that matter, in the past few years. Gone are angst-ridden days, like in August 2011 when U.S. sovereign debt was downgraded for the first time and investors flocked to gold.

That summer, GLD briefly became the biggest ETF in the world, and gold prices hit a cycle-high of $1,921 a troy ounce. But those days are over, and the decade-long rally in gold has been unwinding.

In short, the financial crisis seems to be fading into history, leaving gold and GLD with a different role to play in investor portfolios. So we asked Will Rhind, chief executive officer of the World Gold Council, just how investors ought to think of GLD when the global economy is slowly mending and the era of quantitative easing runs its course.

ETF.com: The gold rally seems to be over, and your tenure is likely to be colored by a different set of circumstances than your predecessor’s. Would you speak to that?

Will Rhind: I think at a very high level, there was a crisis premium to the gold price after the financial crisis and for the next subsequent few years after that. And as things have slowly started to recover, that's naturally coincided with the easing of the gold price over the last couple of years. The market's recovered and the economy has improved. The crisis premium, as a consequence, has decreased accordingly.

So we've had a stable gold price for the last few years. It's traded really pretty consistently within a fairly narrow range. And I think that what is holding the price back, if you will, on a short-term basis, is the head wind around what's going to happen in the U.S. in terms of the first rate hike.

ETF.com: Holding gold back from falling or from having another leg up?

Rhind: From having a leg up. The value of the dollar has an inverse relationship to gold. So once we saw the tapering stop, we saw a rally in the gold price. But while tapering was being talked about, the gold price decreased, and that was one of the sorts of major catalysts for the fall in the gold price a few years ago.

But one thing that is weighing heavily on investors' minds is obviously when the first rate hike happens. And we believe that won't affect the gold price too negatively, because we think a lot of that is priced in to the market already in terms of the expectation of a rate rise. When that happens, I think that's a mental catalyst that will allow people to look forward rather than to worry overtly about the singular rate rise.

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