Gold tracks US-Dollar rather than real interest rates

News Arnulf Hinkel, financial journalist – 30.04.2018

US investors have always looked to the US dollar to estimate short-term movements of the gold price. Over the past years, however, interest rates have, to a certain degree, pushed the dollar into the background as a price indicator. FED decisions and the expectation of a normalizing monetary policy have had a greater influence on the development of the gold price. Recently, the US dollar has made a comeback, with the negative correlation to the gold price strengthening. According to a current analysis by the World Gold Council, this could very well continue over the next months.

Negative interest rates influence the gold price more than positive ones

While in times of negative real US interest rates gold returns tend to be twice as high as the long-term average, they also remain positive as long as positive real interest rates do not exceed 2.5 per cent. Despite a clear negative correlation, this means that falling interest rates tend to lead to higher gold prices, but rising interest rates do not necessarily weaken the gold price.

US-Dollar/gold price correlation is negative yet asymmetric

As the World Gold Council's recent analysis of monthly gold data from January 1971 to March 2018 shows, the gold price tends to rise twice as high in times of a weak dollar than it drops alongside a rising US-dollar. This asymmetric correlation can also be observed with gold price movements in relation to other currencies. During the European sovereign debt crisis, gold price movement was similar to the development of the euro. Many investors therefore use this asymmetry in the performance of the gold price in comparison to major currencies to hedge against potential currency weaknesses with gold.

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