Daily Noise in Gold and the Euro

By: Adrian Ash | Wed, Feb 3, 2010
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Five stars, one Dollar exchange rate, and a 51% gain in gold...

"GOLD RETREATS as Dollar gains," says a headline from Dow Jones Newswire.

Which makes sense. Because when that isn't happening, "Gold adds to gains as Dollar falls versus Euro," says Reuters.

Thus the intuitive Dollar-gold pairing swings now one way or other in the financial pages...gaining here, falling there...but always joined together as the journalist's deadline is heard hurrying near.

The "whys" and the "wherefores" of a quick market comment demand it as well. Ask a professional analyst for a 10 or 15-word soundbite, and they'll most often tell you, if not vice versa, that "The Dollar is stronger, keeping precious metals under pressure."

Beyond the daily noise, however - and with the single currency unwinding its last eight months' action vs. the Dollar at the end of last week - gold has in fact moved up against both.

You wouldn't know it from scanning the newswires. But since the Euro last crossed through $1.40 - the level it just slipped through once more - gold has risen 22% for US investors. And of course, it's risen by precisely that same percentage for German, French and Italian buyers too.

Because with the EUR/USD cross unchanged since May 2009, the rise in the gold price shows equally on both sides of the pairing.

Indeed, at that $1.40 level - now the Euro's average value since Sept. 2006 - gold has risen time and again...adding 51% for investors both in the States and in Europe from the first crossing of $1.40 in Sept. '07.

Yes, a daily rise in the Euro typically means the Dollar-gold price is up. On a daily basis, their average one-month correlation is now +0.51 since the single currency's launch. That's stronger than gold's correlation with any other asset bar silver.

But it would stand at +1.0 if they moved entirely in lock-step. And as the waxing and waning mapped in the chart above shows, the Dollar's demise hit the currency buffers back in summer '08.

Priced in gold, on the other hand, the greenback has continued to fall. As has the Euro.



Adrian Ash

Author: Adrian Ash

Adrian Ash

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK's leading financial advisory for private investors, Adrian Ash is the head of research at BullionVault, where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

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