How is the dollar affecting gold?

“Prices of gold and silver have risen sharply over the past two months. Those gains have come alongside a stronger U.S. dollar and higher interest rate yields, which has surprised some market participants. The reason why gold has risen in this environment becomes clearer when the reason for rising yields and dollar are taken into consideration.

U.S. yields have been rising in response to somewhat healthy economic conditions and stubborn inflation. The dollar is being helped by the relative strength in U.S. yields compared to other major currencies and on safe haven demand. The stickiness of inflation and safe haven demand have played an important role in driving higher and supporting gold prices at elevated levels.

It is becoming increasingly clear that inflation is not likely to return to various central banks’ inflation targets anytime soon. While this was to some extent expected by CPM Group, the data is now confirming this risk. The stickiness in inflation data has forced markets to make large adjustments to their interest rate expectations both in terms of timing of the first cut as well as the number of cuts. Where at one-point markets were expecting five or six rate cuts during 2024, they are now expecting one. If inflation data continues on its current path, even the one
rate cut this year might become doubtful.

CPM Group has repeatedly said that market expectations of interest rates were excessively optimistic. Rates are expected to be kept higher for longer. It is unclear at this time if tighter monetary policy is facing greater lags or rates at current levels are just not sufficient in pushing
inflation lower. There have been concerns whether higher rates are bad for gold prices. They are not if inflation starts to show signs of rising, as this would put downward pressure on real rates, especially if nominal rates are held steady at present levels.”