What Do Carney’s Targets Mean For British Gold Investors?

When the Bank of England released its inflation report in July, it did so with forward guidance of 2.5% consumer price inflation and 7% unemployment rate. The unemployment rate is currently at 7.8%.

At the press conference, following the release of the report, Carney made it clear that unemployment is now a key target of the MPC, “until the unemployment threshold is reached, and subject to maintaining price and financial stability, the MPC intends not to reduce the stock of asset purchases financed by the issuance of central bank reserves.”

As we reported at the time, Mark Carney delivered his first keynote speech last week and gave ‘reassurance’ that even if unemployment falls below 7% it is merely a ‘staging post along the road to recovery. Unemployment must fall below this post before the MPC will even begin “to consider whether to raise the bank rate”.

We concluded that Carney’s rescue remedy for the British economy was reckless for savers causing them to turn to alternative assets. In fact, we said it is so bad that Carney is practically encouraging gold investment. Not only are savers experiencing negative real interest rates but the value of their cash is being eroded.

Given gold is often referred to as a hedge against central banks’ policy decisions, we thought it would be worth looking into how the gold price correlates to any changes in their key targets.

Prior to Mark Carney’s arrival we ‘merely’ had to consider how the change in interest rates would affect our savings and our gold investments.

The annual change in the real rate of interest over the last thirty years has ranged between -3.1% and 4.5%. In contrast the percentage change in the gold price has ranged from -18% to 35% from year to year.

Looking at just UK based data, i.e. our real rates of interest versus the sterling gold price we find that there is little correlation prior to 2009. For instance, 1997 and 1981 saw the biggest annual decline in the gold price in the period studied, however the real rates of interest were average compared to the rest of the data set.

When the gold price saw its largest annual percentage increase in 2008, real interest rates were negative. Since 2008, negative rates continue to haunt British savers and the gold price continues to climb year on year. However as the rates continue to improve (as they have done since 2009) the percentage increase in the gold price has begun to slow. In the period since 2009 gold has not risen nearly as rapidly.

When rates were at their most negative (in the time period studied) the percentage increase in the gold price was ‘only’ 8%. This is still significant, but the 29 years prior to 2009 suggests that there was little correlation between British real rates on interest and the sterling gold price.

However, the recent correlation seen in the last four years is likely to be down to the synchronicity of Western central banks’ approaches to solving this economic crisis.

As Carney plans to keep rates low and encourage inflation, we are clearly heading for territory seen between 2008 and 2009 when rates were some of the lowest in the data set and gold made the biggest gains.

Unemployment – the new target

If you are a US citizen then you are quite used to the central bank targeting unemployment, however here in the UK this is not a familiar technique.

In this aspect, how has the UK fared compared to the gold price? Well in regard to rates and prices, they do not appear particularly related. One could perhaps, very tentatively suggest that as the unemployment rate picks up one sees a small increase in the gold price, particularly during the 1980s.

As with the real rate of interest, the change from month to month in unemployment is generally very small. Gold, in contrast can be more volatile. In regard to how the two correlate, we again find little relationship between the two.

There is little correlation when looking at the percentage changes of each. When the percentage change in unemployment is greater than 5% (either way) then the gold price reacts is more likely to increase when unemployment also increases. But when unemployment falls by at least 5% gold can go either way.

What do Carney’s targets mean for British gold investors?

By the end of 2016 interest rates will have been at record lows for 8 years. It is estimated that during this time savers will have lost (and are set to lose) £500bn.

This is a dire situation for savers and pensioners, but some comfort should be taken that there is one asset on which the Mark Carney and his team have very little impact.

For British investors it should come as a relief that there is little correlation between the real rates of interest, as influenced by the MPC’s monetary policy, and the unemployment rate, now a new target of the committee.

As savers face a further five years of negative rates, and a potential rise in unemployment, it is would be prudent to look into alternative investment classes. Gold is just one of these. Had savers decided to invest in gold at the beginning of the crisis they would not currently be facing a £500bn loss.

Mr Carney is proving to be another friendly central banker for gold investors.