Features

What gold is telling us about the direction of interest rates

The price of gold is on the rise, gaining around 10% in the past two months, and almost 30% since early 2016.

884_MW_P04_Markets_Bottom

Del6094201

The price of gold is on the rise, gaining around 10% in the past two months, and almost 30% since early 2016. At around $1,330 an ounce, it is not far off hitting a four-year high against the dollar. Being priced in a weak dollar helps, but the key driver for the increase is the inflation scare, which has reminded investors that an ounce of gold has maintained its purchasing power for thousands of years.

Gold's "great virtue is its ability to hold its value", says John Authers in the Financial Times, but its renewed lustre isn't merely about inflation jitters. It also reflects "a lack of fear of the Fed [Federal Reserve]". Gold has no yield, so if interest rates rise rapidly it becomes less appealing than bonds or cash, while inflation would be squeezed out of the system. Gold's latest upswing, then, suggests that people don't think the US's central bank will move quickly enough to nip inflation in the bud.

Given central banks' lousy record recent history shows they are always caught on the hop this seems to be a very reasonable bet. There are also plenty of potential geopolitical flashpoints that could boost demand for the traditional safe haven, while rising wealth in emerging markets should prop up the long-term jewellery demand. Gold has further to go.

Recommended

Gold will soon regain its shine
Gold

Gold will soon regain its shine

With the gold price down by 9.5% in the first quarter of 2021, it has been a rotten start to the year for gold.
9 Apr 2021
Why gold has been such a bad investment so far this year
Gold

Why gold has been such a bad investment so far this year

Gold – the ultimate safe haven investment – is proving anything but safe. It’s lost over $200 an ounce since its high at the start of the year. Domini…
3 Mar 2021
Gold will soon regain its lustre
Gold

Gold will soon regain its lustre

Despite roaring commodity prices and central bankers stoking inflation, gold is being left behind. But that won't last.
26 Feb 2021
Gold has had a tough start to 2021, but we’ve been here before
Gold

Gold has had a tough start to 2021, but we’ve been here before

Gold has had a disappointing start to the year – in an increasingly digital world, it’s the ultimate analogue asset. Nevertheless, says Dominic Frisby…
20 Jan 2021

Most Popular

How will Joe Biden’s capital gains tax rise affect crypto prices?
Bitcoin & crypto

How will Joe Biden’s capital gains tax rise affect crypto prices?

The US president wants to increase capital gains tax – and that’s going to hit a lot of American cryptocurrency speculators. Saloni Sardana looks at h…
14 May 2021
US stocks look expensive – here’s what to own instead
Investment strategy

US stocks look expensive – here’s what to own instead

Right now, US stocks are among the most expensive in the world. So if you want a decent return on your investments, you should look into diversifying …
17 May 2021
Inheritance tax planning: the rules around gifting
Inheritance tax

Inheritance tax planning: the rules around gifting

There are plenty of legal ways to minimise an inheritance tax bill. Perhaps the simplest is to give away assets to reduce the size of your estate. Dav…
11 May 2021