Strongest Force On Gold Isn't Rates, It's The Dollar - World Gold Council
(Kitco News)- The dollar is emerging as the dominant driver of goldprices, according to the World Gold Council.
In the short and medium term, gold’s prices can be explainedby both the U.S. dollar and interest rates, but according to a recent report bythe WCG, the dollar will overtake rates to explain the direction of the yellowmetal.
“The correlation between gold and US rates is waning and theUS dollar is again a stronger indicator of the direction of price,” the reportsaid.
Analysts at the WCG reported that as of April 2018, the U.S.dollar index (DXY) has held a correlation of -0.58 with gold since the start of2018, compared to 0.02 for 12-month T-bills. This is a stark contrast to theprevious year when treasuries beat out the dollar in influencing gold, with acorrelation of -0.31 and -0.27, respectively.
Historically, gold has held an inverse relationship with thedollar, but the yellow metal has risen 8.5% since the Federal Reserve raisedrates in December 2017 while interest rates climbed at an accelerated paceduring the same period.
The inverse relationship between gold and rates cansometimes be broken, owing to external macro forces that are not directlyimpacted by U.S. interest rates, according to the WCG.
“US interest rates do not necessarily influence the behaviorof global consumers of gold jewelry or of technology demand. Nor do they affectthe behavior of investors outside the US for whom local interest rates mattermore than U.S. rates,” the report said.
The WCG added that historically, real rates had the mostinfluence on gold during periods of shifting expectations of monetary policy,such as the 2013-2017 period when investors expected U.S. monetary policy tobecome more restrictive.
In contrast, the current monetary environment has notchanged since the Fed began raising rates in December 2015 for the first timesince the end of the 2008 recession.
According to the report, the dollar’s relevance for goldlies in its influence from the broader economy.
“In our view, one of the reasons the dollar will overtakerates to explain the direction of the gold price, is that movements in thedollar already reflect inflation expectations of monetary policy in the U.S.,”analysts said.
Importantly, the dollar “also reflect[s] expectations ofinterest rate differentials between the US and major economies, as well asinvestors’ views on trade imbalances - all factors that are currently relevantfor gold,” the report added.
The WCG said that gold’s correlation with the dollar is notsymmetrical, as a weak dollar has traditionally provided a higher boost to theyellow metal than the drag from a strong dollar.
By David LinFor Kitco News
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