Gold’s correlation with US interest rates wanes, back to tracking dollar

Gold’s price performance is no longer influenced by the interest rates in the US while the US dollar is again becoming a strong indicator of the price direction of the yellow metal, the World Gold Council (WGC) has said.

The gold industry body, in a report, said this trend will continue over coming months even while the dollar won't explain the precious metal's movements entirely.

"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," WGC said in its recent investment update.

Further, the analysis showed that higher real rates have not always resulted in negative gold returns.

One of the reasons the dollar will overtake rates to explain the direction of the gold price is that movements in the American unit already reflect inflation expectations of monetary policy in the world's largest economy, the WGC said.

At the same time, they also reflect 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, it added.

"It is important to note that the correlation between gold and the dollar is not symmetrical. Historically, a weak dollar tends to provide a stronger boost to gold's performance than the drag created by a strong dollar."