Xu Xiaoqing's Column: Why Do Gold and the U.S. Dollar Continue to Diverge? (AI Translation)
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By Xu Xiaoqing
在传统定价框架中，黄金走势取决于美元的实际利率水平，实际利率越高，黄金价格越低，反之亦然；多数时候，美元的实际利率也决定了美元指数的高低。所以，通常认为黄金和美元呈反向关系。
In the traditional pricing framework, the trend of gold prices is dependent on the real interest rates of the U.S. dollar. Higher real interest rates typically lead to lower gold prices, and vice versa. Most of the time, the real interest rate of the dollar also determines the level of the U.S. Dollar Index. Therefore, it is commonly believed that gold and the U.S. dollar have an inverse relationship.
但过去四年中，可以看到同样的美元水平下，黄金价格在不断提高，疫情后黄金估值中枢不断抬升。这一现象背后的驱动力是全球央行持续增加黄金储备。俄乌冲突是一个重要催化剂：由于美国加大对俄制裁，冻结其美元资产，使得更多国家开始减少美元货币储备，转而增加实物黄金，全球去美元化趋势已逐步形成。
Over the past four years, despite a consistent dollar level, gold prices have been on the rise, with valuations increasing post-pandemic. This phenomenon is driven by global central banks continuously boosting their gold reserves. The Russia-Ukraine conflict has served as a significant catalyst: U.S. sanctions against Russia, including freezing its dollar assets, have prompted more countries to reduce their dollar reserves and increase physical gold holdings, gradually shaping a global trend towards de-dollarization.
过去几年里，黄金价格在方向上大多和美元保持了负相关性，只是在美元上升时跌得少、美元回落时涨得多，这样价格中枢就提高了；但今年以来，美元和黄金的背离程度进一步加剧，两者方向开始趋同。是什么原因导致高利率、强美元背景下，黄金仍能维持强劲上涨态势呢？
Over the past few years, gold prices have largely maintained a negative correlation with the U.S. dollar, typically falling less when the dollar rises and gaining more when it retreats, thus elevating the price baseline. However, since the beginning of this year, the divergence between the U.S. dollar and gold has intensified, with their directions starting to align. What factors contribute to gold's robust rise despite high interest rates and a strong U.S. dollar?
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- Gold prices have historically been inversely related to the U.S. dollar and real interest rates, but in recent years, despite similar dollar levels, gold prices have risen due to increased reserves by global central banks and de-dollarization trends accelerated by geopolitical events like the Russia-Ukraine conflict.
- The divergence between the U.S. dollar and gold has intensified this year, with gold prices rising even amidst high interest rates and a strong dollar, influenced by expectations of continued fiscal expansion depending on the outcome of the U.S. presidential election.
- The long-term logic for rising gold prices hinges on whether U.S. fiscal expansion continues, which could weaken the dollar's long-term credit; however, short-term economic benefits from fiscal expansion have kept the U.S. economy relatively strong compared to others.
The traditional pricing framework for gold suggests that its value is inversely related to the real interest rates of the U.S. dollar, with higher rates typically leading to lower gold prices and vice versa [para. 1]. Despite this, over the past four years, gold prices have risen even amidst consistent dollar levels, largely due to global central banks increasing their gold reserves significantly post-pandemic. This trend has been further catalyzed by geopolitical tensions such as the Russia-Ukraine conflict, which prompted nations to shift from dollar reserves to physical gold in a move towards de-dollarization [para. 2].
Historically, gold prices have maintained a negative correlation with the U.S. dollar. However, recently this relationship has shown signs of alignment rather than divergence. This change raises questions about what factors are currently driving the robust rise in gold prices despite high interest rates and a strong U.S. dollar [para. 3]. One significant factor is the potential continuation of excessive fiscal expansion in the U.S., which could weaken the long-term credit of the dollar depending on future political developments, particularly the outcome of upcoming presidential elections [para. 4].
The prospect of Donald Trump being re-elected appears to be influencing market sentiments significantly. Trump's potential re-election is viewed as likely leading to greater fiscal expansion due to his populist policies and fewer legislative constraints compared to a scenario where Joe Biden is re-elected. This perception is strengthened by Trump’s rising approval ratings and recent economic indicators suggesting possible stagflation under Biden’s administration [para. 5][para. 6].
Despite these dynamics, it's crucial to understand why the U.S. dollar hasn't weakened alongside these developments. The resilience of the dollar can be attributed to short-term benefits from fiscal expansion which temporarily boosts economic performance relative to other economies. However, if fiscal revenues do not increase correspondingly in a high inflation environment, continued fiscal deficits could lead to rising net interest expenditures, eventually becoming a major financial burden for the government and weakening economic support in real terms [para. 7].
In terms of how gold prices are influenced by interest rates today versus historically, it seems that nominal interest rates set by U.S Treasury yields and inflation expectations (significantly impacted by crude oil trends) now play more critical roles than market-traded Treasury Inflation-Protected Securities (TIPS). During periods of high inflation like today or during the 1970s, crude oil prices become a more dominant factor affecting inflation expectations and thus real interest rates impacting gold pricing [para. 8].
Overall, while global central banks continue their shift towards increasing their gold reserves as part of de-dollarization efforts, any short-term independent rally in gold prices would likely depend on whether geopolitical conflicts further drive up oil prices or if they begin to weaken instead [para. 9].
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