Gold Price Increasingly Influenced By Declining Dollar Rather Than Interest Rates

‘[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