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% (