2 Forces Pulling Gold In Opposite Directions

Feb. 15, 2022 5:20 AM ETDBP, JJP, GLTR, JJPFF, GLD, IAU, DGL, BAR, SGOL, OUNZ, GLDI, IAUF, GLDM, AAAU, BGLD, IGLD, GBUG, IAUM, PBUG, WGLD, PHYS, PHYS:CA5 Comments
CME Group profile picture
CME Group
3.28K Followers

Summary

  • The yellow metal has been trading in a narrower and narrower range.
  • Gold can be seen as a currency that pays no interest on deposits.
  • Getting gold to break out of its current range, might depend on one of these two forces, inflation, or rate expectations, gaining the upper hand.

Empty Product Stand, Platform or Podium

peterschreiber.media/iStock via Getty Images

By Erik Norland

At A Glance

Inflation and the potential for multiple Federal Reserve rate hikes could be pulling gold in different directions

Over the past seven years, gold prices have shown a negative correlation with changes in expectations for Fed rate hikes

With U.S. inflation rising above 7% and surging in volatility in bond and stock markets, why has gold been so stable? The yellow metal, whose price rose over 50% in 2019 and 2020 has been trading in a narrower and narrower range.

gold

Bloomberg Professional

It seems that there are two forces, of roughly equal strength, pulling gold in opposite directions. On the one hand, higher inflation is reducing the purchasing power of fiat currencies like the U.S. dollar. In theory, this should support the price of gold.

On the other hand, investor expectations for U.S. monetary policy have changed dramatically. As recently as October, investors didn't even price one single Fed rate hike for the next year. Now, just four months later, investors price that the Fed could hike rates five or six times in the next 12 months.

This change in investor expectations may be what has held gold back from rallying. Gold can be seen as a currency that pays no interest on deposits. As such, when central banks tighten monetary policy, investors often perceive fiat currencies as becoming relatively more attractive. Indeed, over the past seven years, gold prices have shown a consistent negative correlation with changes in expectations for Fed rate hikes.

Getting gold to break out of its current range, might depend on one of these two forces, inflation, or rate expectations, gaining the upper hand.

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

This article was written by

CME Group profile picture
3.28K Followers
As the world's leading and most diverse derivatives marketplace, CME Group is where the world comes to manage risk. Comprised of four exchanges - CME, CBOT, NYMEX and COMEX - we offer the widest range of global benchmark products across all major asset classes, helping businesses everywhere mitigate the myriad of risks they face in today's uncertain global economy. CME Group offers the widest range of global benchmark products across all major asset classes also, offers exciting career opportunities in a variety of disciplines. We value being a good corporate citizen and take an active role in the communities where we work and live.Our Investor Relations page contains comprehensive investor relations information for CME Group shareholders. Take a closer look at CME Group's sponsorships with Saracens, the Blackhawks and others.

Recommended For You

Comments (5)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.