Gold prices in USA depict the true essence of USA’s economy. The a-cyclical nature of gold prices exhibit that higher the price, weaker the economy. With inverse relationship being strong, it is highly significant to analyze the determinants of gold prices. Many economists insist that the British economy has a very high impact on American gold prices. Their hypothesis was observed true in the recent global crisis following Brexit when all other commodity prices in USA fell but price of gold rose sharply to $1,315 an ounce on June 24th, up by 4.7% from the previous day. Here are top five reasons for why British economy influence gold prices in USA to such an extent.
Trade between US and UK
United Kingdom is top most export destination of USA. From 2001-2013, almost 1566 tons of US gold were exported to Britain. This comprises of 27% of total gold export from US in these years. Considering the high volume of trade, it is obvious that any moment in Britain’s economy changes the demand pattern of gold and leaves significant impact on gold prices.
Demand of dollar
Both gold and dollar tend to move in opposite directions. When demand for dollar falls, investors and Banks Park their money in gold. Similarly, when demand for dollar rises, the same investors withdraw money from gold and invest in currency. Now, the demand of dollar is again dependent on inflow and outflow of dollar from the most developed economies of world and UK is one of them. In short, the rise and fall in British economy effects demand of dollar which in terms effect gold prices in usa.
UK Stock market
Stock market is one of the greatest determinants of gold prices. When the stock market is volatile, investors prefer to park their money in safer commodities and gold is one of their top most choices. Even though it doesn’t have any yield, its demand rises in stock market crisis. UK stock market is indirectly linked with the gold prices in usa. For example: Immediately after Brexit, UK stock market faced its worst drop in last few decades. The FTSE lost more than 3.2 % on the Brexit referendum day. We also saw that gold prices in USA touched record levels in the post Brexit scenario.
Inflation and Global Money Supply
Global money supply plays an important role in deciding gold prices. With higher CPI inflation, gold prices improve. It is obvious that tight monetary policy in UK aims to reduce inflation. But this tight monetary policy helps gold prices to rise. Hence, a decision of British government about CPI has direct impact on US gold prices.
Interdependence of developed countries
The exchange of goods and services has made all countries inter-dependent. No economy is alone in facing recession or expansion. Especially the developed countries whose economic actions draw patterns of macroeconomic variables of other developed and underdeveloped countries.US and UK are not excluded from this interdependence. Any action in UK impacts US economy in some way and vice versa. Gold prices in USA, being a major macroeconomic variable, is certainly affected by British economy.