Gold prices have risen by more than 3% globally as the US Dollar struggles yet again. A combination of the fear of inflation, plus a dash of caution from investors, has seen investors move away from USD to take risks in other markets but as a precaution not away from gold.
The greenback is broadly weaker as of the past few weeks, with inflation looming large in the US. Investors returned to the Dollar briefly when the global stock markets ‘corrected’ themselves recently (read: lost $4 trillion from being too bullish) but have since moved away again. According to Reuters, the dollar index could be heading for its worst weekly fall since this time two years ago.
The price rise comes from the growing demand for gold so that investors can hedge their bets against inflation. In the past seven days the price of gold has gone up by £18.23 (1.93% rise), $42.98 (3.27% rise) and €13.95 (1.30% rise). The similarity between the Pound and Euro shows that for stronger currencies it’s simply the threat of inflation, but the Dollar’s weakness has added even further increase in value per ounce of gold.
Typically, inflation leads to interest rate rises, which in turn mean that gold struggles to preserve its value. Simply put, when interest rates rise then people feel less need for solid storage of wealth like gold. The current change in gold prices started to adhere to that pattern of cause and effect, but it quickly rallied and has since shot up. Such a change is indicative that there is a window of opportunity to be had for gold bullion and we’re currently entering that period.
With inflation guaranteed to keep rising, the Federal Reserve, Bank of England, and other national financial institutions must tackle the squeeze on wages, savings, and outgoings. Raising interest rates reduces inflation and restores balance to the true value of goods and services, but these institutions are hesitant to raise interest rates too quickly or destabilise the current 4% global economic growth which is repairing a lot of the damage done by the 2008 crash.
The result of this hesitancy is a negative real interest rate. This is where inflation keeps rising just ahead of interest rates, and it affects the worth/buying power of fiat currencies like the Dollar, Euro and Pound. In contrast, gold is unaffected, so demand rises for the yellow metal and prices rise as a result.
Given the initial fall in gold price, some experts aren’t confident that this rally in the price of gold is sustainable long term but continued negative real rates would prove them wrong. The Federal Reserve and Bank of England have both recently announced interest rate rises will be coming, with the Fed expected in March and the BoE in May. If these organisations announce strong increases to the interest rates then the price of gold could suffer as interest rates overtake inflation, but if this report from the Bank of England is to be believed then the UK plans to stay behind the curve of inflation with its incremental interest rate rises, and often the UK is doing what the US plans to do.
