Chennai: The US dollar has been trading range-bound after a fall in May, with potential implications for the price of gold, as noted by the World Gold Council.
Gold’s Performance and Outlook
Gold saw a third consecutive monthly gain in May, rising by 2 percent to $2,348 per ounce. Although the increase was more moderate compared to the previous two months, gold still reached an all-time high of $2,427 per ounce mid-month before experiencing a pullback due to profit-taking.
US Dollar and the Fed
The US dollar saw a reversal of its rally in May, marking its first decline in 2024. This decline was attributed to easing inflation, providing the Federal Reserve with more flexibility to consider interest rate cuts. The World Gold Council suggested that the dollar’s bullish trend may be losing momentum, which could potentially benefit gold prices going forward.
Impact of Dollar Weakness on Gold
With the US dollar likely in a range-trading environment following its recent strong performance, the possibility of a further pullback after its first down month in 2024 looms. The World Gold Council highlighted that a sustained period of dollar weakness could alleviate some challenges and offer upside potential for gold in the coming months.
Historical Trends
Looking back at historical data, the World Gold Council found that periods of prolonged dollar contraction have historically been favorable for gold. In instances where the dollar fell significantly, gold prices tended to rally. For example, during periods when the dollar decreased by at least 10 percent over six months since 1971, gold posted an average return of over 14 percent, with positive returns occurring 87 percent of the time.
Considering these trends, a weaker US dollar could be a supportive factor for gold prices in the coming months.
Insight:
Historical data shows that the relationship between the US dollar and gold prices has been significant. Investors often turn to gold as a safe-haven asset when the value of the dollar weakens, making it an attractive option during times of economic uncertainty. Additionally, the potential for interest rate cuts by the Federal Reserve could further drive demand for gold as investors seek alternative assets for wealth preservation.
