Gold rose and the dollar fell in mid-December after the US central bank decided to wind back its stimulus measures.
In the UK, the decision by the Bank of England on December 16 to raise interest rates to 0.25 percent from their historic low of 0.1 percent, which surprised some market commentators, boosted the pound, improving the affordability of gold for savers.
The US Federal Reserve’s move to reduce stimulus measures was a response to a recovery of the world’s largest economy during the pandemic and a pickup in inflation.
Expectations of rising interest rates in the United States in 2022 could drag on prices of gold, which bears no interest, as alternative yield-bearing assets will become more attractive to investors.
However, the persistence of inflation, running at an annualised level of 6.8 percent in the United States, its highest rate for around 40 years, will continue to underpin gold, which is seen as a hedge against rising prices.
“Unless the Fed eventually goes for much bigger rate increases than expected, the general public will be stuck in a negative real rate position where inflation increases are higher than those of interest rates being received. In theory that tends to be positive for gold,” wrote Lawrie Williams, gold market commentator for bullion dealer Sharps Pixley.
“But a more aggressive rate policy also tends to increase the dollar index, which is seen as negative for the gold price, although initial reaction was for the greenback to fall back, but only by a little.”
In Britain, the rise in the pound could be supported by expectations of further rate rises, with some analysts predicting another hike of some 15 basis points when the Bank of England’s rate-setting committee meets in February.
The latest inflation data, showing a 5.1 percent annualised rise in prices in November, the highest level in more than a decade, had raised expectations that the UK central bank would hike rates despite worries over the impact of the fast-spreading Omicron coronavirus variant on the economy.
The latest data showing that employers had hired a record number of staff, had also raised expectations that the Bank of England would raise rates.
A stronger pound against the US dollar, may make it more affordable for UK-based savers to add to their gold holdings, with projections of persistent inflationary pressures set to add to the allure of gold as protection against rising prices, with the authorities predicting that UK inflation could hit 6 percent in April.