JOHANNESBURG (miningweekly.com) – A new report published by the World Gold Council (WGC) shows that the US dollar is again a strong indicator of the direction of the gold price.

“Historically, gold has had a consistently negative correlation to the US dollar. Gold’s relationship with the dollar is determined by US-based gold supply and demand, as well as by the status of the dollar as the reserve currency globally,” the report notes.

It adds that, while the US dollar is often a good indicator of gold’s price performance, in recent years, gold has seemingly reacted more to the behaviour of US rates. Yet, gold continues to trend higher, increasing by 8.5% since the Federal Reserve rate hike in December 2017, despite interest rates rising at an accelerated pace. 

The report further highlights that the increased negative correlation of US rates and gold price between 2013 and 2017 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.

“Periods when real rates had higher influence on gold coincided with shifts in monetary policy – either when it was very restrictive or very accommodative. This makes sense, as marginal changes to monetary policy during such periods would generally have larger effects on the global economy.”

Intuitively, gold returns should be higher in periods of negative rates, given the low opportunity cost of holding. Conversely, higher real rates should push gold prices lower.

But 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, the report states.

It points out that drivers of the gold price can be grouped into four categories, namely wealth and economic expansion, market risk and uncertainty, opportunity cost and momentum, and positioning.

It adds that, while gold’s performance is the result of interactions between these categories, drivers related to wealth and economic expansion are generally more relevant for gold’s long-term trend. 

“As we look forward, we believe that variables such as the US dollar, inflation expectations, market uncertainty and positioning, will play a significant role in gold’s performance,” the report says.