The rise and fall of gold and silver prices can be traced back to two broad factors
- The rise and fall of the dollar
- Real interest rates
That is mostly it. Precious metals do particularly well during currency crisis and are therefore a hedge against debasement of the domestic currency value. Investors that note the loss of purchasing power as an issue will often chose gold as a safe haven bet. By that logic the reverse is also true. A strong currency does not attract interest toward gold. So when the dollar is rising in value against major currencies as maybe measured by the
dollar index we see gold and silver prices decline.
Same is the fate in relation to real interest rates. Real interest rates are the difference between the rate of interest and inflation. Inflation becomes important as one of the possible side effects of monetary policy or debasement of the currency. It is not always the case but when it is interest rates are used as a tool to keep it in control. Thus precious metals markets also follow trends in real interest rates as a signal of loss in
purchasing power. So if real rates start falling or turn negative the interest in precious metals as a hedge goes up and vice versa. If markets perceive the inflation to be good and rates high enough to compensate for it they may not chase precious metals as an investment vehicle.
