Gold is known as a store of wealth and has traditionally performed well during times of economic weakness. It has also been able to hold its value during inflationary environments.
The price of gold is decided by closed physical auctions held twice a day. The benchmark prices are known as the LBMA Gold Price.
Currency Markets
Gold is a popular investment and trading commodity. As such, it is influenced by similar factors that affect other commodities and currency pairs. In addition, a significant part of gold’s investment demand is driven by central banks’ monetary policy. Massive monetary expansion contributes to weakening major currencies, dropping bond yield and raising XAU/USD quotes.
Furthermore, a significant portion of gold investment demand is motivated by the inflation hedge motive. The fact that gold is in relatively fixed supply helps make it an effective hedge against inflation. A rise in inflation or expected inflationary expectations increases investors’ interest in buying gold and drives up prices, while a drop in inflation or low expected inflationary expectations reduces investors’ interest and pushes down gold prices.
However, it is important to note that the inverse relationship between gold and a country’s fiat currency is not always valid. For example, if the XAU/USD rises in India due to higher demand from the jewellery manufacturing industry, it does not necessarily mean a decline in value of Indian rupee.
Interest Rates
Interest rates can also have a huge impact on Gold as it is seen as a safe haven during times of economic uncertainty. There is generally a negative correlation between Gold prices and interest rates, meaning that when interest rates are high it makes stocks and government bonds more attractive investments which tends to reduce demand for Gold, therefore causing its price to fall.
The Federal Reserve’s interest rate policy can also have an impact on the Gold market. The Fed sets the country’s monetary policy and often adjusts it according to domestic and global economic factors. This can lead to changes in the Federal Funds rate, which then affects other interest rates like the US Treasury bond yield.
Expected long-term real interest rates, as measured by the PTR survey, have an inverse relationship to the relative Gold price, which suggests that the inflation protection motive is at play in this market. Innovations in the pessimistic expectations variable, however, have no significant effect on the real Gold price.
Sentiment
During a time of heightened risk-aversion, Gold continues to be sought after as a safe-haven asset. Investors have been looking to diversify their portfolios and reduce exposure to equities amid rising consumer prices, mortgage rates, market volatility and pessimistic economic sentiment.
Gold tends to rise during periods of inflationary pressures and in times of geopolitical uncertainty. This year, the Gold price has been boosted by fears of a COVID-19 pandemic and Russia’s war in Ukraine.
Investors are also weighing the potential for another round of US rate hikes as inflation continues to rise and yields move higher. However, with the US Fed signaling a dovish tilt, the outlook for the Gold market has shifted.
Seasonal Trends
Historically, gold has strong seasonality driven by periodic surges in global demand. While this pattern has been suppressed by the Fed-fueled extreme market distortions, it is likely to reassert itself as the normal in coming years.
Typically, September is gold’s strongest month as Western jewelers start to build inventory ahead of the holiday season. The next strongest month is January, due to the strong purchase patterns observed in Eastern nations as they prepare for their Lunar New Year celebrations. The weakest months are March, April and June.
Meanwhile, India’s autumn wedding season drives enormous gold demand in the world’s biggest consumer. This clockwork seasonal spike usually pushes prices higher into October, when gold’s key seasonal bottom is carved on average. Smart contrarian investors and speculators can deploy capital at these low gold prices to ride the metal’s major winter rally. On average, this has led to big gains over the years. But not all will be savvy enough to do so. Gold rate
