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Despite the recent recovery of the US dollar, the XAU/USD gold price managed to return to stability around and above the psychological resistance of $2000 an ounce, which confirms the strength of the bullish trend. Yesterday, the gold price rose towards the $2011 resistance level, after it was sold at the end of last week, to the $1982 support level. It settled around the $2006 level at the time of writing the analysis, waiting for anything new.
In general, gold prices are about to hit another record high, as a confluence of market forces prompted investors to invest in the precious metal in recent months. Historically, gold was seen as a hedge against inflation, and given the high price environment now, a rally would make perfect sense. But is this really it? Are the price movements of gold and consumer goods really in sync?
For more than a year, the US Federal Reserve has tried to rein in soaring inflation by tightening monetary policy. To some extent, that worked. The latest data shows that the US Consumer Price Index was only 0.1% higher in March, which is better than expected and healthier compared to 5% a year ago. And from this, we can see that inflation in the US is showing signs of slowing down, however, gold is still gaining a lot of momentum. This would challenge the popular perception that gold is a hedge against inflation. In fact, the relationship between inflation and the yellow metal was not as direct as we think.
Contrary to popular belief, it would be an exaggeration to call gold the “perfect inflation hedge.”
Analysis of historical data indicates that the correlation coefficient between the CPI and the price of gold is very close to zero over the long term. Only during certain periods (such as the recession of the 1970s) when the two values had a positive correlation, but in general, there is no distinct pattern of establishing a long-term correlation. According to Amy Arnott, portfolio analyst at Morningstar, gold’s inflation correlation has been relatively low – 0.16 – over the past half century. “Gold is not really an ideal hedge,” added Arnott, who analyzed the returns of various asset classes during periods of above-average inflation.
And “If you look at the very long term, gold should hold its value against inflation. But in any shorter period, it may or may not be a good hedge.”
Therefore, the role of gold as an effective hedge against inflation is more than a simplification that has been evident in public knowledge over the years. If it’s not really the price levels, what else can the value of gold be tied to? One economic indicator that may best explain gold’s behavior during periods of inflation – which is also linked to inflation itself – is real interest rates.
As we know, interest rates have been rising continuously since the first quarter of 2022. By the end of March 2023, the US Federal Reserve has already announced its ninth consecutive rate hike, bringing the base rate to the highest level since 2007. Tightening of the RBI entails The Monetary Fed made interest rates as high as possible by raising the discount rate (what it charges banks) and the federal funds rate (what commercial banks charge each other).
Macroeconomic theory states that a higher interest rate would discourage consumer spending and borrowing, which in turn slows economic activity and helps keep inflation in check. Under this scenario, fixed income investments become very attractive to the general public instead, as higher interest rates mean higher returns for their money. By the same token, gold loses a lot of attractiveness because it pays no interest or dividends.
Therefore, the consensus among market analysts and investors for years has been that gold is negatively correlated with real interest rates (interest rates adjusted for inflation). According to Swiss investment bank UBS, a rise in the real price, all else being equal, “raises the cost of holding gold, and investors tend to unwind their positions.”
A study published in the Financial Analyst Journal found the historical correlation between real interest rates and the price of gold to be -0.82, which pretty much describes the inverse relationship.
- There is no change in my technical point of view, as the return of the XAU/USD gold price around and above the psychological resistance $2000 an ounce will guarantee the bulls the opportunity to continue controlling the trend.
- The success of breaching last week’s resistance of 2048 dollars an ounce will support the strongest move to breach the record and historical price of gold ever.
- The continuation of the recent selling operations may give the bears the opportunity to move towards the support levels 1959 and 1938 dollars.
- The last level is important to confirm that the trend has turned bearish.
In general, the price of gold this week will be affected by the level of the US dollar, the reaction to China’s data, and the policy signals of global central banks, especially the US Federal Reserve.
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