Gold has been on a tear recently climbing nearly $350 or about 15% since the beginning of March. What makes this move so shocking is that is in the face of a much stronger US dollar index and rising interest rates. Before we take a deeper dive, here are the daily charts for each:
Historically, gold has held a strong negative correlation against the USD index for obvious reasons. Perhaps a bit less obvious is gold's negative correlation to higher interest rates. After all, the last time rates went up in a significant manner was in the 1970's which was a stellar decade for gold. But more recently, the consensus opinion has been that higher rates make bonds more attractive relative to gold thus higher rates have hurt the price of gold (I'm not entirely sure i buy that premise but that is what the pundits on Wall Street tell us.)
Recently, gold has been moving much higher in spite of an incredibly bearish environment for precious metals. Why has gold completely ignored its long-term historical relationship versus the USD and its more recent relationship with interest rates? And what in the world would happen to the price of gold if either the USD or interest rates fall in a meaningful way?
Just how substantial has the rally in gold been? Not since the FED took rates to 0% and pumped $5T USDs directly into the capital markets in 2020 has gold and silver appreciated as quickly as it has over the past six weeks. Gold's move has been unprecedented in light of the strength in the USD. Typically, I would move away from an asset class as overbought as gold is right now, but the USD is just as overbought. Something has to give and when it does, the volatility in gold could increase even further.