Why Gold Price Suddenly Upsurges Above US1400 per Ounce?

Gold price suddenly upsurges above US$1400 per ounce from about US$1270 in the past 30 days, it is an 8.8% hike! The upsurge was especially swift in the past few days, as shown in Figure 1, from about US$1340 on Jun 20 to US$1406 on Jun 24 (17:30 HK Time).

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Figure 1 Gold Price from May 21 to Jun 21, 2019. Source:

The recent hike is commonly imputed to the sudden drop of the US Treasury Yield, probably due to the Fed’s potential cut of interest rate in view of the coming global recession.

However, it is well known that gold price is not correlated to interest rate, but more related to real interest rate, as gold price is a good hedge of inflation.

There have been some articles discussing about the inverse relationship between gold price and real interest rate. Figure 2 shows an example of the studies.

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Figure 2 Gold Price and 10-year Inflation-indexed Treasury Rate (Inverted). Source: Sunshine Profits

However, when inflation-indexed treasury rate (a proxy of real interest rate) is more likely to be stationary, whereas gold price is not, any short-term regression analysis results of the two series may be spurious, according to Granger and Newbold (1974). Their negative correlation, if any, may not be a causality relationship but via another channel.

There have been few academic studies on the relationship between the two series. For example, Abdullah and Bakar (2015) “demonstrated that the price of gold and real interest rates are inversely related as revealed through the Gibson’s Paradox.”

It is highlighted that “the role of gold as a long run hedge against inflation, short-run hedge against exchange rate movement and a diversifier of risk in investment portfolios”, the upsurge of gold price in the wake of the potential cut in Fed’s interest rate, it may reflect a market expectation of a long-term high inflation or a short-term drop in US currency rate, due to the potential reduction of return of US Treasury Bills.

In fact, the US currency index drops from above 98 in the end of May to 96.06 at 6:19am EDT on Jun 24 (Figure 3). However, the US Currency Index is a comparison between the strength of US dollars and a basket of other currencies, rather than gold. In other words, it depends on the money supplies of different countries, but gold supply is relatively fixed in short-term. Thus, gold price (measured in US dollars) can be interpreted as a measure of the market expectation of the purchasing power of the US dollars.

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Figure 3 US Currency Index. Source: Market Watch

In the current fiat money world, gold becomes one of the few benchmarks for measuring the purchasing power of the currency, it is quite difficult to derive any other methods by using other fiat based metrics to measure the non-fiat based benchmark. It may explain why there have been very few empirical studies on the determinants of gold price.

In a nutshell, it is NOT a gold price rise, but just an expected drop of the US dollar’s purchasing power.


Abdullah, A. and Bakar, M.J.A. (2015) Application of Gold Price, Interest Rates and Inflation — Expectations in Capital Markets, International Journal of Economics and Finance 7(2), 293–302.

Granger and Newbold (1974) Spurious Regressions in Econometrics, Journal of Econometrics 2, 111–120.

ecyY is the Founder of Real Estate Development and Building Research & Information Centre REDBRIC

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