- Why people invest in gold?
- Main gold rate movers
Precious metals are traded on advanced spot and forward contracts online, including on the London Metal Exchange and the New York Mercantile Commodity Exchange (also known as COMEX). Gold or XAU/USD- as commonly known by traders -fluctuates over time providing trading opportunities. Typically, markets prefer to invest in bonds and equities rather than gold, as alloys do not generate income. So, what makes people trade on the Gold rate?
Market Fear and Gold Rate
During turbulent times such as economic indecision, natural disasters, geopolitical tensions, trade and military wars the yellow metal becomes more attractive to investors, as it has been considered for many years as a safe-haven asset. The global recession caused by the Coronavirus pandemic in 2020 combined with the uncertainty of the economic recovery, whether it will take V, L, or W shape led the gold rate in August to overtake the $2,000 threshold and print an all-time high at $2,075 o/z.
US Federal Reserve Policy and Gold Rate
Markets see Gold as an inflation hedge or as an investment to protect the decreased purchasing power of a currency that results from the loss of its value due to rising prices or due to inflation. Additionally, money loses value as is more printed, while the supply of gold is relatively limited. Therefore, the yellow metal’s investors pay great attention to the Federal reserve’s committee meetings to find out about the central bank’s policy.
Gold traders follow the Fed releases and press conferences focusing on the quantitative easing program (printing money) updates, and the policymaker's expectations for the future interest rates changes. Therefore, if the US Federal Reserve hints that a rate hike may take place soon, this could reflect negatively on the gold rate. On the other hand, if the Fed signals a possible rate cut, that could affect gold’s rate positively. It is worth noting that, the Federal reserve builds its monetary policy according to the US economy performance, taking into consideration growth levels, inflation, and unemployment rates.
USD Price vs Gold Rate
Given that gold is priced in the US dollar, logically both assets have an inverse correlation ie, the yellow metal’s price raises when the greenback loses value relative to other currencies and vice versa.
Nonetheless, it may not be always the case and it is possible to see Gold and the US dollar rising or falling together, depending on the Fed monetary policy and the market mode. Additionally, during the Coronavirus pandemic, the greenback has transformed from being a risk-correlated asset to a safe-haven, weakening further its inverse correlation with Gold.
To summarize, the Gold rate thrives in moments of uncertainty. That said, factors like the US Federal reserve’s monetary policy and the US dollar price should be taken into consideration.
Chart source: Capex Webtrader