Oil prices have increased sevenfold since 1999; industrial metals have increased threefold since 2001. Similarly, the extraordinary gold bull market at the end of the seventies occurred in the context of rising oil and commodity prices. This parallelism, however, is not perfect. The average correlation between weekly price changes of gold and oil throughout the last 20 years is a mere 0.1. For metals, the correlation with gold is slightly higher but remains below 0.2. Both correlations have varied heavily within the period; currently, they are clearly on the high side (Graph 1). Graph 1: Correlation between gold, metals and oil prices Gold - Metals (GSCI)  Gold - Oil (Brent)  0.8  0.6  0.4  0.2  0  -0.2 Correlation of weekly price changes over a 1-year period -0.4 01.01.1983  01.01.1988  01.01.1993  01.01.1998  01.01.2003  Despite similarities in price movements, the gold market has a number of distinct features relative to other commodity markets. Arguably, the most important distinction is the fact that the ratio of available supply to annual production is much higher for gold than for other commodities. A significant proportion of the estimated 160,000 tonnes of all gold worldwide available in the form of jewellery, bars, coins, etc. (sixty times the annual mine production) could be brought to market at relatively low cost.
[11] Productivity growth impacts R* through firms’ optimal level of capital for production, in other words the demand for capital from firms. Lower productivity reduces the potential returns on new investment (the marginal product of capital) and this reduces firms’ demand for capital at a given interest rate. In equilibrium this reduction in demand lowers R*. The model simulations suggest that this effect accounts for almost half of the decline in Global R* over this period. Population ageing has been driven by a decline in population growth rates relative to the high levels seen following the Second World War and a marked increase in life expectancy. Importantly, however, in the model the impact of ageing comes almost entirely from the rise in longevity, rather than the decline in population growth rates. What this means is that the effect of population ageing on the trend real rate is not a consequence  Page 8  of the so-called ‘baby boom’. Instead, it reflects the fact that the oldest generations in the population – including older retirees – also tend to be those who have accumulated the most wealth. This naturally occurs as households accumulate wealth over their working life, in order to fund their retirement. This means that a shift in the age distribution towards these cohorts, in other words population ageing, will increase total wealth in the economy. [12] The equilibrium real interest rate falls to incentivise firms to invest this additional wealth into productive capital.