- Lower inflation expectations hurt gold prices…until the US dollar started to struggle
- A higher US dollar, higher interest rates and low inflation expectations are negative for gold
Impact of inflation expectations
The substantial drop, 25%, in Brent oil prices since mid-June has had a significant impact on inflation expectations. This drop did not only push eurozone inflation expectations lower, but also US inflation expectations. As a result, financial markets also adjusted their views and now expect more monetary policy accommodation. In the case of the ECB, financial markets think that it is very likely that the ECB will start buying sovereign bonds in the foreseeable future. We, however, expect it to expand its asset purchases with for instance agency debt. In the case of the Fed, financial markets remain of the view that the Fed will only slightly adjust interest rates next year, while we expect more rate hikes by the Fed.
Gold price are usually negatively affected when oil prices move lower. This is because fewer investors will buy gold with an inflation fear motivation. Therefore, the drop in oil price had a negative impact on gold prices, especially as the US dollar also rallied (see first graph on the right). The turnaround in gold prices came when investor sentiment deteriorated, US growth expectations were lowered and comments from dovish Fed officials were put at centre-stage. This manifested itself in lower US Treasury yields and a lower US dollar (see second graph on the right). As a result, gold prices recovered. Going forward, we expect a higher US dollar, an upward adjustment in US interest rate expectations for 2015, low inflation expectations and a lower gold price.