Since July 11, gold has been in a short-term upward trend. The yellow metal has gained more than 8% since then until the end of August, mainly thanks to the depreciation of the U.S. dollar, as one can see in the chart below.
Chart 1: Gold prices (yellow line, left axis, London P.M. fix) and the U.S. dollar index (red line, right axis, trade weighted index against major currencies).
The U.S. dollar index declined because of political turmoil in the Trump administration and the narrowing divergence between the U.S. and the Eurozone economy. Actually, the economic growth in the latter outpaced the former expansion in the first half of the year. The surprising economic performance in the Eurozone, which eased political uncertainty after Macron’s triumph in the French presidential elections, boosted the expectations of the ECB’s tightening. As a result, the EUR/USD exchange rate soared, which drove gold’s rally.
Another bullish factor in the analyzed period was the decrease in real interest rates due to softened expectations for the next hikes in the Federal funds rate. As the next chart shows, real interest rates started to decline at the beginning of July, after the June FOMC minutes which were interpreted by markets as slightly dovish.
Chart 2: Gold prices (yellow line, left axis, P.M. London Fix) and the real interest rates (red line, right axis, yields on 10-year Treasury Inflation-Indexed Security, in %) over the last 12 months.
About the Author
Arkadiusz Sieroń is a certified Investment Adviser. He is a long-time precious metals market enthusiast, currently a Ph.D. candidate, dissertation on the redistributive effects of monetary inflation (Cantillon effects). Arkadiusz is a free market advocate who believes in the power of peaceful and voluntary cooperation of people. He is an economist and board member at the Polish Mises Institute think tank. He is also a Laureate of the 6th International Vernon Smith Prize. Arkadiusz is the author of Sunshine Profits’ monthly Market Overview report, in which he keeps subscribers up-to-date regarding key fundamental developments affecting the gold market and helps them prepare for the major changes.