Strongest Force On Gold Isn't Rates, It's The Dollar - World Gold Council
In the short and medium term, gold’s prices can be explained by both the U.S. dollar and interest rates, but according to a recent report by the WCG, the dollar will overtake rates to explain the direction of the yellow metal.
“The correlation between gold and US rates is waning and the US dollar is again a stronger indicator of the direction of price,” the report said.
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 of 2018, compared to 0.02 for 12-month T-bills. This is a stark contrast to the previous year when treasuries beat out the dollar in influencing gold, with a correlation of -0.31 and -0.27, respectively.
Historically, gold has held an inverse relationship with the dollar, but the yellow metal has risen 8.5% since the Federal Reserve raised rates in December 2017 while interest rates climbed at an accelerated pace during the same period.
The inverse relationship between gold and rates can sometimes be broken, owing to external macro forces that are not directly impacted by U.S. interest rates, according to the WCG.
“US interest rates do not necessarily influence the behavior of global consumers of gold jewelry or of technology demand. Nor do they affect the behavior of investors outside the US for whom local interest rates matter more than U.S. rates,” the report said.
The WCG added that historically, real rates had the most influence on gold during periods of shifting expectations of monetary policy, such as the 2013-2017 period when investors expected U.S. monetary policy to become more restrictive.
In contrast, the current monetary environment has not changed since the Fed began raising rates in December 2015 for the first time since the end of the 2008 recession.
According to the report, the dollar’s relevance for gold lies in its influence from the broader economy.
“In our view, one of the reasons the dollar will overtake rates to explain the direction of the gold price, is that movements in the dollar already reflect inflation expectations of monetary policy in the U.S.,” analysts said.
Importantly, the dollar “also reflect[s] expectations of interest rate differentials between the US and major economies, as well as investors’ views on trade imbalances – all factors that are currently relevant for gold,” the report added.
The WCG said that gold’s correlation with the dollar is not symmetrical, as a weak dollar has traditionally provided a higher boost to the yellow metal than the drag from a strong dollar.