CHART: Gold price winning against US rates

Three weeks ago, the US Federal Reserve's first rate hike since June 2006 saw the gold price tumble to near six year lows.

What has become a rule of thumb for some participants on the gold market is that rising interest rates means a declining gold price. Higher yields raises the opportunity costs of holding gold because the metal provides no income. Higher yields also boosts the value of the dollar which pushes down the price of gold.

Since the global financial crisis the inverse relationship between interest rate expectations and the gold price has only become tighter with some analysts believing it can serve as an early warning system of both the direction and magnitude of the move in rates.

The Fed was keen to draw a line under the great recession by raising rates from near zero where it had been for seven years.  With a fall below $1,050 shortly after the Fed's December announcement, a large chunk of gold's gains over the period of ultra-loose monetary policy and unconventional monetary stimulus, had been wiped out.

Since then however, the gold price has decoupled from its negative correlation to US yields and has been rising despite a stronger dollar. It's way too soon to say that gold has shaken the rate monkey off its back (or that predictions of a major policy reversal by the Fed will transpire).

But as the chart shows all things being equal we should've been looking at a gold price in triple digits by now.

CHART: Gold price winning against US rates

Source: Capital Economics