Gold - All About the Dollar?

By: Adrian Ash | Fri, Sep 17, 2010
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The race to debase only looks set to raise gold's global appeal still further...

GOLD is suddenly all about the Dollar again. Or so you might think.

After its longest run of moving in tandem with the trade-weighted Dollar Index since midsummer 1991 (45 trading days; average correlation +0.58), the gold price in Dollars resumed its commonly-assumed relationship with the greenback last Friday, moving opposite to the currency's forex fluctuations.

Tuesday then brought the first of this week's three new record highs. Only the Indian Rupee, to date, has suffered a similar fate.

What next? History says to expect further Dollar-led gold action ahead, at least in the headlines. Because any approach of the strong, positive correlation achieved this summer is typically followed by a stretch of strong negative correlation, with the Dollar and gold moving in opposite directions.

Gold vs. USD Index

But that doesn't mean non-Dollar investors won't also see fresh gains or highs in gold, however - not with gold continuing what remains a powerful long-term uptrend against all major currencies, and not with central banks everywhere desperate to devalue their own money against the greenback.

"There's certainly investor nervousness about monetary policy around the world since the Yen intervention," as Mitsubishi's new precious metals strategist Matthew Turner (formerly at the VM Group) tells Reuters.

"A lot of people are sensing a race to the bottom by central banks to print more of their currency, to reflate their economies, and gold is getting support from that."

The Bank of Japan is now actively selling Yen to buoy the Dollar, while the Bank of England has held real Sterling interest rates below zero for 24 months running. Whatever the political rhetoric during May's Greek deficit crisis, France and Germany would rather see a weak than strong Euro, while Beijing's new "flexibility" - a prelude, perhaps, to its new Yen buying strategy - has so far delivered only a 1.4% rise in the Yuan's Dollar value since June.

That's barely a ripple compared with the Yuan's 4.8% rise of Q1 2008, and nothing against the 5.5% rise in the Kiwi, 8.7% rise in the Aussie, or 15% rise in the Swissie of the last 3 months.

BullionVault's Global Gold Index Chart

Longer-term, as you can see, gold's bull market to date hasn't really been about any particular currency. It really is about all of them.

Gold has quadrupled and more against all the world's money since the start of 2000, as our Global Gold Index shows. (It maps the daily gold price in the world's top 10 currencies, weighted by size of economy and starting at 100 on New Year's Day 2000). And most critically for traders trying to second-guess the Dollar gold price, throughout 2010 to date - and also across the last four decades as well - gold's correlation with the Dollar Index is statistically insignificant (+0.02 and minus 0.15 respectively).

 


 

Adrian Ash

Author: Adrian Ash

Adrian Ash
BullionVault.com

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.

About BullionVault

BullionVault is the secure, low-cost gold and silver exchange for private investors. It enables you to buy and sell professional-grade bullion at live prices online, storing your physical property in market-accredited, non-bank vaults in London, New York and Zurich.

By February 2011, less than six years after launch, more than 21,000 people from 97 countries used BullionVault, owning well over 21 tonnes of physical gold (US$940m) and 140 tonnes of physical silver (US$129m) as their outright property. There is no minimum investment and users can deal as little as one gram at a time. Each user's unique holding is proven, each day, by the public reconciliation of client property with formal bullion-market bar lists.

BullionVault is a full member of professional trade body the London Bullion Market Association (LBMA). Its innovative online platform was recognized in 2009 by the UK's prestigious Queen's Awards for Enterprise. In June 2010, the gold industry's key market-development body the World Gold Council (www.gold.org) joined with the internet and technology fund Augmentum Capital, which is backed by the London listed Rothschild Investment Trust (RIT Capital Partners), in making an $18.8 million (£12.5m) investment in the business.

For more information, visit http://www.bullionvault.com

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Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events - and must be verified elsewhere - should you choose to act on it.

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