In what should come as no surprise to those who follow the gold market, the World Gold Council cited the recent round of unconventional monetary policy by the world's central banks in once again laying out its strategic case for investment in gold in its latest Quarterly Statistics Commentary released earlier today.
Lest there be any doubt about the impact of central bank money printing announcements on the price of gold, the graphic below was provided to codify that relationship in the third quarter, a period during which the gold price jumped more than 11 percent.
It's rather simple actually.
Despite the fact that official government measures of inflation are not menacing in the least, just the prospect of hundreds of billions (if not trillions) more dollars and euros being created out of thin air to buy government debt and/or mortgage securities spurs gold investors to buy more of the metal, what is increasingly seen as the only global currency that can't be debased by central banks.
As usual there is a good deal of relevant data in this report, including a timely graphical reminder about the inverse correlation between the trade-weighted dollar and the gold price, what has, in recent weeks, proven to be a stumbling block for the yellow metal.
As for the investment case for gold, that too is rather simple, resting upon these four tenets:
- Inflation risk is understandably the strongest rationale for gold's reaction to unconventional policy
- Closely linked to the inflation effect is the impact that unconventional policy has on currencies.
- The willingness of central banks to engage in protective strategies provides an implicit 'put' option - an implied guarantee to prevent precipitous falls in asset prices.
- An environment of unprecedented low interest rates - negative in real terms - can greatly impact savers and investors.
While recent strength in the U.S. dollar may make it rough going for gold investors in the weeks ahead, that is, until attention turns back to the U.S. economy and "fiscal cliff" after the November election, over the long term, investors in exchange traded funds such as the SPDR Gold Shares ETF (GLD) are likely to be rewarded by heeding this wisdom.
Disclosure: I am long GLD.
Additional disclosure: I also own gold coins.