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World Gold Council – Investment Update: Gold tracks the dollar as rates take a back seat

World Gold Council23 April 2018

Investors often use the direction of the US dollar as a bellwether for gold’s performance. However, over recent years, short-term movements in gold have been more heavily influenced by US interest rates and expectations of policy normalisation. Our analysis shows that the correlation between gold and US rates is waning and that the US dollar is again a stronger indicator of the direction of price. And, in our view, this will continue over the coming months – even while the dollar won’t explain gold’s movements entirely. Furthermore, the analysis shows that higher real rates have not always resulted in negative gold returns.

Linking gold, the US dollar and interest rates

There is no one single driver of the price of gold. Generally, gold’s price drivers can be grouped into four categories:

1) wealth and economic expansion; 2) market risk and uncertainty; 3) opportunity cost, and 4) momentum and positioning (see page 3).

Table 1: The influence of US rates on gold has fallen behind that of the dollar

Correlations between gold, the US dollar, and various interest rate benchmarks*

Gold versus US Dollar


In the short and medium term, two variables attract investors’ 10 commandmentsattention most: the US dollar and interest rates. Historically, gold has had a consistently negative correlation to the US dollar (Chart 1). 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 (Gold and currencies, Gold Investor, October 2013). And while the US dollar is often a good bellwether 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. A key question for investors is, therefore, what matters more – the direction of the US dollar or the direction of interest rates  The answer is, generally, the US dollar. But there are exceptions to this rule.

Chart 1: There is a consistently negative correlation between gold and the US dollar

Correlation between gold (US$/oz) and the US dollar real exchange rate*

gold versus the USD
*Based on weekly returns between January 1971 and March 2018.
Source: Bloomberg, ICE Benchmark Administration, World Gold Council


Daniel Fisher formed physical Gold in 2008, after working in the financial industry for 20 years. He spent much of that time working within the new issue fixed income business at a top tier US bank. In this role, he traded a large book of fixed income securities, raised capital for some of the largest government, financial, and corporate institutions in the world and advised the leading global institutional investors. Daniel is CeFA registered and is a member of the Institute of Financial Planning.

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