GLD: Is Gold’s Direction Driven by Fear of inflation?

The gold market kicked off September on a negative note as its price declined by 3%. Gold ETFs such as SPDR Gold (GLD) and iShares Gold Trust (IAU) also didn’t perform well in the past few days. The recent recovery in the US dollar and the expected hawkish changes to the FOMC’s policy may have played a role in weakening the gold market. Specifically, the Fed’s hawkish moves are lowering down fear factor from a potential rise in inflation. This turn of events is keeping gold down. An alternative theory, however, suggests it’s not the lack of inflation that weakened gold; it was the rise in long term interest rates. Let’s examine these difference perspectives.

Euro/USD Falling Down

ECB’s recent surprise decision to slash down its cash and deposit rates dragged down the Euro/USD below 1.3. Further, the ECB also plans to implement an asset-backed securities program, which could, down the line, bring the Euro/USD even lower.

During August and September, the correlation between gold and Euro/USD was weak. Nonetheless, the correlations were mid-strong with the Australian dollar/USD and USD/ Japanese yen. Thus, if the USD continues to rally against most leading currencies including Australian dollar, Japanese yen and Euro, this trend could also adversely impact the yellow metal.

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