Gold Price Increasingly Influenced By Declining Dollar Rather Than Interest Rates

Gold Price Gains Due To Declining Dollar Rather Than Interest Rates

- Investors should not be put off by higher interest rates, World Gold Council research finds they do not always have a negative impact on gold
- Only short-term movements in gold are 'heavily influenced by US interest rates'
- Correlation between US interest rates and gold is waning, with US dollar a better indicator of short-term gold price

- New findings will reassure gold investors that there is no single driver of the gold price including interest rates and the myth of the "all powerful" central bank

Editor: Mark O'Byrne

What drives the gold price? There is no single answer to that question. It is a multiple of factors, all of which vary in their influence depending on an even greater number of factors.

According to latest research from the World Gold Council, there are two factors in the short and medium-term that attract investors' attention the most: the US dollar and US interest rates.

One overriding belief by gold market commentators and observers is that the direction of the US dollar carries a greater impact on the gold price than US interest rates.

This is understandable given gold's consistently negative correlation to the US dollar.

However, we have all noticed how gold has only reacted positively since the Federal Reserve has been hiking rates since last December - increasing by 8.5%.

So should we therefore assume that US interest rates do in fact matter more to the direction of the gold price?

There is no straight forward answer says the World Gold Council. 'Generally' the US dollar matters most to the precious metal's price movements, 'but there are exceptions to this rule'.

Gold and interest rates: a negative correlation

It makes sense that gold and interest rates should be negatively correlated. One is seen as the opportunity cost of another. Between 2013 and 2017 the negative correlation was strong:

'[This] was likely a result of the strong influence that US monetary policy was exerting across global markets. This period coincided with a shift in investor expectations of US monetary policy from being very accommodative to moving towards normalisation.'

Conversely, higher rates are not always linked to higher prices

We are always quick to assume that US interest rate changes will begin to affect the price of gold. But consider the variety of demands involved in the gold market: jewellery, or technological demands- are they all influenced by US interest rates? The chances are, no.

'US interest rates do not necessarily influence the behaviour of global consumers of gold jewellery or of technology demand. Nor do they affect the behaviour of investors outside the US for whom local interest rates matter more than US rates'

Interestingly the WGC research finds that whilst gold does react best to negative US interest rates, they can remain below 2.5% (significantly higher than today) and average gold returns remain positive.

'Falling rates are generally linked to higher gold prices; yet rising rates are not always linked to lower prices.' 

Take the above with a pinch of salt

These findings with a pinch of salt. There are so many factors that affect the price of gold that investors should not focus on the policies and currency of one country to determine their buying and selling decisions.

The WGC finds four broad categories which affect the price of gold. It is interactions between these categories that affect the performance of the precious metal.

Wealth and economic expansion: periods of growth are very supportive of jewellery, technology, and long-term savings

Market risk and uncertainty: market downturns often boost investment demand for gold as a safe haven

Opportunity cost: the price of competing assets such as bonds (through interest rates), currencies and other assets influence investor attitudes towards gold

Momentum and positioning: capital flows and price trends can ignite or dampen gold’s performance.

When it comes to gold's long-term trend, the lobbying group finds that:

'drivers related to wealth and economic expansion are generally more relevant for gold’s long-term trend. And drivers linked to the other three categories play a significant role in gold's countercyclical behaviour.'

The US dollar will overtake rates when it comes to influence on gold price

In our view, one of the reasons the dollar will overtake rates to explain the direction of the gold price, is that movements in the dollar already reflect inflation expectations of monetary policy in the US. At the same time, they also reflect expectations of interest rate differentials between the US and major economies, as well as investors’ views on trade imbalances – all factors that are currently relevant for gold.


There is an 'asymmetric correlation' between gold prices and the US dollar. Why? Because not everyone pays for their gold in US dollars. Local currency movements impact demand more.

Thus, gold’s behaviour is best understood as a broad fiat currency hedge rather than simply a dollar hedge. This is apparent in periods when major currencies weaken, and investors buy gold to hedge that risk – for example, during the European sovereign debt crisis. In such instances, gold and the dollar have tended to move in sync, with both benefiting from safe haven inflows.

This further explains why the uncertain times ahead due to heightened geopolitical risk are likely to see further gold price gains. Even if the dollar strengthens on announcement of war in Syria (for example) we may still see the price of gold rise.

Read the original research here.

 

Recommended reading

Four Key Themes To Drive Gold Prices In 2018 – World Gold Council

Stock Market Selloff Showed Gold Can Reduce Portfolio Risk

Gold Does Not Fear Interest Rate Hikes

News and Commentary

Gold hovers near 5-wk lows amid dollar pressure, rising yields (Reuters.com)

Asian Stocks Mixed as Tech Rises; Dollar Steady (Bloomberg.com)

Gold prices could ‘test five year highs’ later this year: Researcher (CNBC.com)

Ex-UBS Metals Trader Beats Spoofing Conspiracy Charge (Bloomberg.com)

Deutsche Bank to Reduce Investment Banking in Focus on Europe (Bloomberg.com)

Central Bankers Can’t Agree on Cryptocurrencies (Bloomberg.com)

Debt-Enabled Asset-Bubbles Are On A Crash With Demographics (ZeroHedge.com)

It's 2-Year Yields, Not 10-Years, We Worry About Most (ZeroHedge.com)

Gold prices could 'test five year highs' later this year (CNBC.com)

ABN Amro: Geo-politics and sanctions support commodities (Abnamro.nl)

 

Listen on SoundCloud , Blubrry & iTunesWatch on YouTube below

Gold Prices (LBMA AM)

25 Apr: USD 1,325.70, GBP 949.47 & EUR 1,085.48 per ounce
24 Apr: USD 1,327.35, GBP 951.84 & EUR 1,087.76 per ounce
23 Apr: USD 1,328.00, GBP 950.45 & EUR 1,085.64 per ounce
20 Apr: USD 1,340.15, GBP 953.52 & EUR 1,089.14 per ounce
19 Apr: USD 1,347.90, GBP 950.54 & EUR 1,090.59 per ounce
18 Apr: USD 1,346.55, GBP 949.59 & EUR 1,088.95 per ounce

Silver Prices (LBMA)

25 Apr: USD 16.57, GBP 11.87 & EUR 13.57 per ounce
24 Apr: USD 16.60, GBP 11.90 & EUR 13.59 per ounce
23 Apr: USD 16.94, GBP 12.14 & EUR 13.85 per ounce
20 Apr: USD 17.11, GBP 12.15 & EUR 13.91 per ounce
19 Apr: USD 17.20, GBP 12.09 & EUR 13.91 per ounce
18 Apr: USD 16.95, GBP 11.93 & EUR 13.70 per ounce


Recent Market Updates

- Gold Price Increasingly Influenced By Declining Dollar Rather Than Interest Rates
- Cash “Vanishes” From Bank Accounts In Ireland
- Russia Buys 300,000 Ounces Of Gold In March – Nears 2,000 Tons In Gold Reserves
- Family Offices and HNWs Invest In Gold Again
- New All Time Record Highs For Gold In 2019
- Palladium Bullion Surges 17% In 9 Days On Russian Supply Concerns
- Silver Bullion Remains Good Value On Positive Supply And Demand Factors
- London House Prices See Fastest Quarterly Fall Since 2009 Crisis
- Global Debt Bubble Hits New All Time High – One Quadrillion Reasons To Buy Gold
- Oil Surges Over 8%, Gold and Silver Marginally Higher, Stocks Gain In Volatile Week
- EU and Euro Exposed To Risks Including Trade Wars and War With Russia In Middle East
- Trump Tweets Russia “Get Ready” For Missiles In Syria – Gold, Oil Rise and Stocks Fall
- Private: EU and Euro Exposed To Trade Wars, Energy Dependence, Anti-EU and Anti-Euro Movements

Comments

Brennen81 Thu, 04/26/2018 - 08:16 Permalink

https://ag33.lode.one/

I agree with the above where gold would be a broad currency hedge. But silver is where you should be. LODE is building the world's first Cryptographic Silver Monetary System utilizing blockchain architecture that will enable the creation and distribution of two tokenized assets, each representing a unique relationship to silver bullion.

https://ag33.lode.one/

el buitre Thu, 04/26/2018 - 09:19 Permalink

Golly gosh.  I wonder what the spot price of gold and silver would be if CONgress passed a law with a capital punishment clause and strict enforcement  including public executions of CEO's against naked shorting of gold and silver on the COMEX futures.  As a silver bug, I don't even bother reading these TA articles.  TA means nothing in a totally rigged market by "people" who can print "money" from thin air.

Give Me Some Truth Thu, 04/26/2018 - 09:27 Permalink

“There is no single driver of the gold price.”

Yes, hell there is! The “single driver” is that the Powers that Be know the gold price cannot go up. At least if the  Status Quo they rely on is going to continue.

Blue Dog Thu, 04/26/2018 - 11:10 Permalink

The gold and silver prices are being deliberately suppressed to prop up the dollar. There are what, 500 paper ounces for every physical ounce? Eventually as the dollar dies we'll see metals prices skyrocket. I hold physical gold and silver along with physical cash.

Herdee Thu, 04/26/2018 - 13:36 Permalink

The problem which developed in the correlation is that taking delivery of pure physical Gold has no correlation to the purely electronic, digital world of Chicago, New York and London. There are tens of thousands of claims on every ounce of physical through derivative contracts. That's not real because they can't touch the Gold that goes off market.

ReturnOfDaMac Herdee Thu, 04/26/2018 - 13:43 Permalink

Poppycock!  There is no shortage of gold.  They will simply print as much as needed to satisfy any short term demand.  Same as it ever was.  You will not see gold prices rise unless the dollar itself and the central banks supporting it, are completely destroyed.  And if that happens, you don't want to live in the world that will be left behind.

In reply to by Herdee

Lies All Lies Thu, 04/26/2018 - 15:19 Permalink

Martin Armstrong – who has had some impressive, accurate forecasts via his computer – is adamant that the USD will go from strength to strength; think steam roller smashing all before it..

He’s a bit ambivalent about gold, inferring it will have its day, one day, when confidence in gubermunt finally evaporates and panic sets in. Could be a while before that happens, gold bugs,  so hope you’re under 40 to cash in (but good for the kids, they’ll waste it with glee and never give you a thought..)

It’s interesting to sit on the side-lines and watch the ‘experts’ take opposing views. I’m sure those who get it wrong will be quick to admit it. LOL!

jrock Thu, 04/26/2018 - 18:38 Permalink

How is this shit even news?  A cheap dollar is the PRIMARY reason for an increase in the price of gold.  That is not to be confused for reasons to own gold, however.

DannyTX Thu, 04/26/2018 - 18:42 Permalink

When was this story drafted---months ago?  It's looking like lately that they "cleanest dirty shirt in the laundry" got starched.  The Dollar is going up.