As the weak US job data bolstered the hopes that the FOMC (Federal Open Market Committee) will raise interest rates in the current year, we saw gold prices rally. The weak data led to a fall in the US dollar against the major currency basket. The DXY Currency fell 0.92% on a five-day trailing basis. The 30-day trailing fall is close to 0.8%. On the other hand, gold has risen 2.43% on a 30-day trailing basis. On Tuesday, October 6, 2015, most actively traded gold contracts rose 0.8% and settled at $1,146.40 an ounce on COMEX, a commodity division of the New York Mercantile Exchange. Below is a chart that gives the comparative price performance of gold and the DXY Currency, or the US dollar.
A likely delay in rate liftoff
As the graph helps us interpret, there is a strong inverse relationship between gold prices and the US dollar. If we see the US dollar fall against other currencies, gold can comparatively become cheaper for the strengthening currency. The falling US dollar prompts gold buying and can lead to a rise in the yellow metal.
Gold prices have been recovering from five-year lows recorded in July in the anticipation of tighter monetary policy. Gold is expected to struggle once interest rates rise, as it doesn’t pay interest. This makes it less appealing than interest-bearing assets such as Treasury bonds and dividend-bearing assets such as equities. However, any delay in the rate hike may benefit the precious metals, giving investors some relief. Industry experts and investors vouch for a possible delay in the rate liftoff, which may lead to a rise in the price of gold and will likely put pressure on the US dollar.
Rising gold prices are also helpful for other gold-backed investments such as the SPDR Gold Shares ETF (GLD) and the mining ETF SPDR S&P Metals and Mining ETF (XME). Gold-mining stocks that have seen a rise in their prices on a five-day trailing basis include Alamos Gold (AGI), Kinross Gold Corp (KGC), and Royal Gold (RGLD). These three companies make up 8.4% of the VanEck Vectors Gold Miners ETF (GDX).