The price of gold (XAUUSD) per troy ounce fell below $4,000 on Tuesday amid a rising U.S. Dollar Index (DXY) and cooling December rate cut odds. The DXY measures the performance of the U.S. dollar against a basket of other currencies, including the euro (EUR) and Japanese yen (JPY).
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“With the dollar making new highs, we’re seeing that having a weight on the gold market… some of this recent strength in dollar and the weight in the gold market comes from the less likelihood of a potential rate cut in December,” said High Ridge Futures director of metals trading David Meger.
Gold’s Relationship with the Dollar and Interest Rates
Gold and the U.S. dollar generally carry an inverse relationship, as gold, which is typically priced in dollars, becomes more expensive for foreign buyers when the dollar strengthens. That can lead to weaker demand for the precious metal.
Furthermore, lower interest rates support the rationale to buy gold because it doesn’t pay out interest. In other words, the opportunity cost of holding gold decreases relative to interest-bearing assets, like Treasury bonds, with lower rates. The opposite holds true as well.
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