Greenback-traded commodities – in particular, gold – have been on the up recently. This has been largely due to a weaker dollar, which plummeted last Wednesday as the US Federal Reserve hinted that an interest rate hike might come later rather than sooner. Yesterday, gold closed up for the fourth consecutive session in a row.
The rule of thumb is that gold (or commodities in general) will trade inversely to the dollar. Commodities had previously been under pressure, given the dollar’s persistent upward momentum in anticipation of the rate hike. However, they were given a breather last Wednesday when the dollar fell. The dollar has continued falling since, and commodities have been rising.
As can be seen from the graph, there are some hints of gold and the dollar having an inverse relationship. The dollar had been steadily climbing since last year to reach a crescendo at the 100 mark before beginning its downfall. Meanwhile, gold prices had been fluctuating in the initial months but began a steady decline that mirrored the dollar’s movement from June to November. Gold hit its low at $1149 last week but began rising once again just as the dollar began falling.
But the outlook for gold doesn’t paint a rosy picture; a delay in the interest rate hike might have resulted in a short-term fall in the dollar index, but in the longer term, the dollar is expected to appreciate. This could most definitely result in a retracing of commodity prices.
When exactly the Fed will eventually announce the interest rate hike remains to be seen. Janet Yellen’s choice of words left everyone guessing, but some Wall Street murmurs hint that the Fed will hold off till at least September. The bulls in the gold market are having a field day until the sheen wears off in coming months.
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