WGC Spots U.S Dollar and Interest Rate as Key Drivers of Gold Prices

SEATTLE (Scrap Monster): The Investment Update Report published by the World Gold Council (WGC) has outlined the key driving factors that determine the direction of gold prices. According to the report, gold prices are more influenced by dollars.

Over recent years, the U.S. interest rates and expectations of policy normalization have been the most influential factors that determine the short term gold movement. However, the impact of U.S. rates on gold has started to wane. Instead, the U.S dollar has become a strong indicator of the direction of gold price. As per WGC, the above said trend will continue over the forthcoming months.

In the short and medium term, U.S. dollar and interest rates will continue to attract investors’ attention. Gold has reacted more to the behavior of U.S. rates in earlier days. Since the US Fed rate hike in December last year, gold prices have surged higher by nearly 8.5%. The prices have continued to trend higher despite intermittent rise in interest rates. Normally, higher real rates should push gold prices lower. But an analysis of gold returns suggests that gold returns tend to be double from long-term averages when US real rates are negative.

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The WGC Report groups the drivers of the gold price into four broad categories-wealth and economic expansion, market risk and uncertainty, momentum and positioning and opportunity cost. Generally, the interactions between the above categories determine gold’s performance. However, drivers related to wealth and economic expansion is responsible for determining gold’s long-term trend. At the same time, drivers related to other three factors determine gold’s countercyclical behavior.

According to WGC, gold’s ability to complement other holdings and enhance portfolios makes it a useful asset for investors.