IAUM - 2 Driving Forces Behind The Rally In Gold
Summary
- Gold has a negative correlation with expectations for what the Fed is going to do with rates.
- Just as a weaker dollar is good for the euro and the yen, it’s typically good for gold too.
- Expectations of higher rates tend to hurt gold whereas expectations for lower rates tend to help it.
By Erik Norland
What’s behind the recent rally in gold? And is that rally likely to continue?
Since Nov. 3, gold prices have rallied $300 per ounce, a gain of over 18%. However, gold is still trading in the same range that it has been in since April 2020. It’s merely moved from the bottom of the range toward the higher end of the range but it’s still $130 short of its all-time high.
It seems that two things have sparked the recent rally in gold. First, a patch of soft consumer spending data and lower inflation numbers in the United States have given rise to expectations that the Fed might slash rates by 200bps beginning later this year. Gold is like a currency but one that pays no interest. As such, it has a negative correlation with expectations for what the Fed is going to do with rates. Expectations of higher rates tend to hurt gold whereas expectations for lower rates tend to help it.
Second, the U.S. dollar peaked at the end of September and has begun to fall. Gold has a negative correlation with the Bloomberg Dollar Index. Just as a weaker dollar is good for the euro and the yen, it’s typically good for gold too.
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2 Driving Forces Behind The Rally In Gold