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Gold: What's Driving the Price of the Precious Commodity?

IncomeInsider.org - Tue Sep 12, 2023

Gold is perhaps best known among investors as a safe haven in turbulent times and a hedge against inflation. However, most people may not track its daily price movements as closely as equities and interest rates, which have been rising in 2023. Gold’s price has performed well for the year-to-date and one-year periods. Now trading at $1,912.30 per ounce, it is up 2.49% this year and 14% in the trailing 12 months; for context, the S&P 500 Index is up 16.68% year to date. 

Historically, investors moved funds into gold during recessions. For example, since 1983, the price of gold has risen in six of the eight most significant stock market declines, according to GoldSilver. And, during the 2007-2009 recession, the S&P 500 retreated 60%. However, gold prices rose nearly 26% during that period. 

Current Gold Market

OANDA reports that gold reached a high of $1987.53 on July 20 and then declined due to the rising 10-year U.S. Treasury real yield. The higher yields made holding gold less attractive because gold does not make interest or dividend payments.

However, gold's price has been range bound in the "1,940 to 1,980 range" lately, said Edward Moya, Senior Market Analyst, the Americas for OANDA. Gold investors generally keep a close eye on the value of the U.S. dollar and the inflation rate, which significantly impact gold's price.

Gold's Price Relationship to the U.S. Dollar and Interest Rates

Gold is often considered its own asset and not correlated with the stock market. However, gold is closely related to the U.S. dollar because its U.S. dollar denominated. As a result, it has an inverse relationship with the U.S. dollar; as the value of the dollar increases, gold’s price will fall and vice versa. 

When the value of the dollar declines, investors cannot purchase as much gold per dollar because of the lower purchasing power, which increases gold's price per ounce. However, during periods of high inflation, gold historically remains stable or increases in price, making it a compelling safe-haven asset.

In addition, if the exchange rates of the U.S. dollar decrease relative to foreign currencies, global investors can purchase a larger amount of gold with their currency, increasing demand and driving up gold prices.

Interest Rates

One of the main reasons for investing in gold is to maintain purchasing power now and in future inflationary periods. However, gold's price has climbed in 2023 even as inflation has declined. However, inflation ticked up 3.2% in July, and now the crystal ball is quite cloudy about where rates will go in the coming months. 

Gold's relationship with interest rates is more complex. Overall, they also enjoy an inverse relationship. Generally, gold prices climb as interest rates fall, and gold prices plunge as interest rates rise. For example, between 2001 and 2012, the long-term real interest rate fell about 400 basis points, while the real gold price rose five times, according to the Federal Reserve Bank.

The Federal Reserve of Chicago has commented, “A rise in inflation or inflationary expectations increases investors' interest in purchasing gold and, therefore, drives up its price; in contrast, disinflation or a drop in inflationary expectations does the opposite." 

Recent history has also thrown a monkey wrench into that relationship. To tame inflation, the Federal Reserve raised interest rates at ten consecutive meetings beginning in March 2022. Since then, inflation has declined from about 9% in 2022 to 3.2% in July. However, the price of gold has climbed over that period.

Typically, a climate of rising interest rates indicates a robust economy. As a result, investors may be willing to purchase higher-risk assets like equities. Therefore, demand for gold and precious metals usually retreats, and prices fall.

But suppose there is a different catalyst for the rising interest rates, such as deflating consumer confidence or weak job reports. In that case, investors may move away from higher-risk assets, even when interest rates are high overall, and gold may be favored. As a result, interest rates can have an inverse effect on gold prices, but not every time. 

During the stagflation days of the 1970s, interest rates climbed into the double digits—reaching 13.82% by early 1980. Over that same decade, gold prices ascended from $35 to $850 per ounce, according to NASDAQ

Because of the complex relationship between the price of gold, interest rates, and inflation, experts carefully parse these factors as they prognosticate the future direction of gold prices. For example, Edward Moya of OANDA, wrote on September 12 that gold prices slid that day before a vital inflation report and because the U.S. dollar rose. 

Moya is concerned that inflation will not fall to the Federal Reserve Bank's 2% target rate, and "that has some investors anticipating a pickup in inflation over the next few months." As we noted, higher inflation will lead to additional Fed hikes, which places downward pressure on gold prices. He concludes, "Gold will eventually attract investors, but right now the risks are still for more dollar strength over the short term."

The bottom line: If the Federal Reserve continues to hike interest rates to lower inflation to its target rate, that scenario favors Treasuries, as higher yields offer relatively more attractive returns. However, if the market is worried that the Fed cannot tame inflation, even with higher rates, then gold will be perceived as the better investment or safe haven due to the persistently high inflation.

Ilir Salihi is Senior Editor at GoldIRASecrets.com, an informational, review and news website specializing in the retirement sector of the US precious metals and alternative assets investment market.


On the date of publication, Ilir Salihi did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

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