How much does monetary policy impact the performance of gold?

News Arnulf Hinkel, financial journalist – 28.03.2019

According to the World Gold Council, the main drivers of gold demand can be broken down into four categories: economic expansion, the existence of capital market risks respectively bear markets, short- or medium-term price trends and significant capital flows, as well as opportunity costs, i.e. the prices of competing assets. These are influenced to a large extent by the movements of major currencies – particularly the US dollar – and by the direction interest rates take. The latter are used not only to determine the attractiveness of all forms of savings but also that of government bonds, which are in direct competition with gold in the eyes of many investors.

Gold demand in 2018 dominated by the US dollar

Despite numerous unresolved geopolitical crises – such as Brexit, Italy's national debt and the US/Chinese trade war – on the one hand, and market risks – such as economic slowdowns in China and major emerging markets – on the other, the gold price weakened over long stretches in 2018. The strong US dollar prevailed against the other gold demand drivers. This did not change until the last quarter of 2018, when the US currency lost momentum and the Fed adjusted its interest rate policy.

US monetary policy takes a front seat regarding gold performance

Just as the US dollar largely determined gold's performance in 2018, interest rates could be the driver in 2019. According to an analysis by the World Gold Council, gold tended to become more attractive to investors amid shifts in FED monetary policy from tightening to neutral. However, how swiftly and strongly the gold price rose in post-tightening periods in the past depended on several factors. The World Gold Council has a fairly positive outlook for the precious metal, as the FED’s revised monetary policy is compounded by a weakening of US dollar demand and continuing market risks, expected to further sustain gold prices. 

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