Gold: What has driven recent price declines?
September 1, 2018
Gold: What has driven recent price declines?
Abbey Capital

Gold has fallen more than 11% since its 2018 peak in January, with the market seeing a strong downtrend since late April. The decline is somewhat surprising given the string of geopolitical concerns in 2018, as well as the recent risks posed by the Turkish currency and debt crisis. The strength of the US dollar, higher US yields and the forecast of more aggressive rate hikes by the Federal Reserve have been important factors weighing on the metal.

Gold prices have been in decline since April. Spot gold: 01 September 2017 to 31 August 2018

Source: Bloomberg

What are the key drivers of gold?

Gold is highly liquid and regularly traded for both hedging and speculative purposes. Historically, some of the key factors influencing gold have been:

  • Monetary policy: The opportunity cost of owning gold is largely determined by interest rates, because investors ‘lose out’ on interest income. Rising interest rates and bond yields will therefore tend to provide a disincentive to invest in gold.
  • Central bank reserves: Along with FX reserves, central banks also hold gold as a store of value for its high liquidity and diversification benefits. Accordingly, central bank net buying would generally support gold prices.
  • Haven demand: Investors tend to flock to safe-haven assets during periods of uncertainty and risk-off sentiment. Gold is often considered a haven asset, typically rallying during periods of both market and geopolitical instability.
  • Supply & demand: Although consumer demand, particularly from emerging economies such as China and India, has been a driver of gold at times, institutional allocations tend to be a more important demand driver. On the supply side, mine production appears to have plateaued in recent years, although the importance of this is mitigated by gold’s non-perishability.
  • Inflation: As gold is a real asset, it should theoretically maintain its value in times of high inflation. However, if rising inflation is coupled with rising real interest rates, gold may be shunned for interest-paying assets. For example, between 1970 and 1980, historically high inflation saw negative real interest rates and gold prices surge. However, gold declined thereafter and traded within a range in the 1980s as monetary policy adjusted and real interest rates turned positive.
  • US dollar: As gold is priced in USD, there is an inverse relationship that occurs as a stronger dollar would make gold more expensive to non-US buyers, thereby reducing demand. A second factor would be that USD strength impacts how central banks shift reserves, with a weaker dollar making gold more attractive.
What has driven gold prices in 2018?

Gold rallied early in Q1 2018, largely due to a weaker USD, before a spike in equity market volatility provided further support. As geopolitical considerations and the prospect of Federal Reserve tightening came into focus, gold entered a broad trading range which persisted for the remainder of the quarter.

Gold broke below its trading range in April and prices have continued in a downtrend since. This decline mirrored a rally in the USD, which benefited from rising 2018 rate hike expectations and a widening yield differential between US and other developed market bonds. At the same time, global trade concerns appeared to ease, as the US and China entered negotiations, with the lessened geopolitical risks weighing on haven demand.

From the start of Q2 2018 to 31 August 2018, gold declined -9.3%, while the US dollar index climbed +5.7% over the same period. With USD strength as the dominant theme over the past four months, there has been reduced demand for buying gold despite rising trade tensions between the US and its trading partners.

More recently, there was no support stemming from the Turkish currency and debt concerns, which seemed to spur on declines across a number of emerging market equities and currencies. Gold’s inability to rally during these recent periods of market disturbances highlight the overriding impact that the USD has had on the market. At the end of August 2018, the 100-day correlation between the US dollar index and spot gold was at -0.50, after reaching -0.75 in May, which is the most negative it has been since September 2008.


Although gold has historically attracted safe-haven flows in times of market stress, its perceived safe-haven status is only one of a number of important drivers.

In 2018, rising US yields and the strength of the US dollar appear to have been the primary drivers of the metal’s underperformance, even as the risk environment, particularly in emerging markets, has shown signs of deteriorating.


Important Information, Risk Factors & Disclosures

This document is for the purpose of providing general information and does not purport to be full or complete or to constitute advice.

Abbey Capital is a private company limited by shares incorporated in Ireland (registration number 327102). Abbey Capital is authorised and regulated by the Central Bank of Ireland as an Alternative Investment Fund Manager under Regulation 9 of the European Union (Alternative Investment Fund Managers) Regulations 2013 (“AIFMD”). Abbey Capital is registered as a Commodity Pool Operator and Commodity Trading Advisor with the U.S. Commodity Futures Trading Commission (“CFTC”) and is a member of the U.S. National Futures Association (“NFA”). Abbey Capital is also registered as an Investment Advisor with the Securities Exchange Commission (“SEC”) in the United States of America. Abbey Capital (US) LLC is a wholly owned subsidiary of Abbey Capital. None of the regulators listed herein endorse, indemnify or guarantee the member’s business practices, selling methods, the class or type of securities offered, or any specific security.

While Abbey Capital has taken reasonable care to ensure that the sources of information herein are reliable, Abbey Capital does not guarantee the accuracy or completeness of such data (and same may not be independently verified or audited) and accepts no liability for any inaccuracy or omission. Opinions, estimates, projections and information are current as on the date indicated on this document and are subject to change without notice. Abbey Capital undertakes no obligation to update such information as of a more recent date.

Pursuant to an exemption from the CFTC in connection with accounts of qualified eligible persons, this report is not required to be, and has not been, filed with the CFTC. The CFTC, the SEC, the Central Bank of Ireland or any other regulator have not passed upon the merits of participating in any trading programs or funds promoted by Abbey Capital, nor have they reviewed or passed on the adequacy or accuracy of this report.

Risk Factors: This brief statement cannot disclose all of the risks and other factors necessary to evaluate a participation in a fund managed by Abbey Capital. It does not take into account the investment objectives, financial position or particular needs of any particular investor. Trading in futures is not suitable for all investors given its speculative nature and the high level of risk involved. Prospective investors should take appropriate investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in the countries of their citizenship, residence or domicile. Investors must make their own investment decision, having reviewed the private placement memorandum carefully and consider whether trading is appropriate for them in light of their experience, specific investment objectives and financial position, and using such independent advisors as they believe necessary. The attention of prospective investors in the fund is drawn to the potential risks set out in the private placement memorandum of the fund under the heading ‘Risk Factors’.

Where an investment is denominated in a currency other than the investor’s currency, changes in the rates of exchange may have an adverse effect on the value, price of, or income derived from the investment. Past performance is not a guide to future performance. Income from investments may fluctuate. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors and can result in a total loss of initial investment. Certain assumptions may have been made in this analysis, that have resulted in the returns detailed herein. No representation is made that any returns indicated herein will actually be achieved.

Potential investors are urged to consult with their own professional advisors with respect to legal, financial and taxation consequences of any specific investments they are considering in Abbey Capital products.

The information herein is not intended to and shall not in any way constitute an invitation to invest in any of the funds managed by Abbey Capital. Any offer, solicitation or subscription for interests in any of the funds managed by Abbey Capital shall only be made in a private offering to qualified investors pursuant to the terms of the relevant private placement memorandum and subscription agreement and no reliance shall be placed on the information contained herein.

This document and all of the information contained in it is proprietary information of Abbey Capital and intended solely for the use of the individual or entity to whom it is addressed or those who have accessed it on the Abbey Capital website. Under no circumstances may it be reproduced or disseminated in whole or in part without the prior written permission of Abbey Capital.