The Daily Market Report: Gold Surges Back Above $1200
26-Mar (USAGOLD) — Gold surged back above the pivotal $1200 level amid heightened geopolitical tensions in the middle east. The yellow metal reached a 3-week high of 1220.00 before pulling back into the range.
A Saudi Arabia led coalition launched airstrikes against Iranian backed Houthi rebels in Yemen, in support of the deposed government. The U.S. National Security Council confirmed that President Obama authorized “logistical and intelligence support.”
Iran has denounces the bombing as “US-led aggression”. As the U.S./Iran nuclear negotiations near an important deadline, one has to wonder how these latest geopolitcal events might color those talks.
The dollar index fell to a 3-week low overseas as the market continues to unwind long positions that were premised on what many perceived to be the inevitability of Fed tightening this summer. Given the plethora of weak U.S. economic data that have emerged lately and dovish tenor of the latest FOMC statement — and comments of Fed chair Yellen — folks aren’t so sure about that rate hike anymore. You may recall it wasn’t so long ago that many were anticipating lift-off in March.
The World Gold Council released a new Gold Investor report today that focuses on gold’s shifting correlation to the dollar. The WGC has taken notice of the fact that gold price increases twice as much during periods of dollar weakness than it falls during periods of dollar strength.
The resiliency of gold in the face of the recent dollar gains is something we have reported on throughout the rally in the greenback. Think about it; it was just 3-weeks ago that the dollar index was setting 12-year highs above 100.00 and gold didn’t even approach last November’s low at 1131.15, which marked a 5-year low.
There was much talk at the time that the EUR-USD rate was destine for parity. The last time the euro and the dollar were at parity was 2002. Where was gold at that time? It was less than $350!
From that perspective, I would suggest that “weakness” in the gold market has been greatly exaggerated. Certainly when you look at gold priced in euros and yen, the underlying strength in the yellow metal is even more apparent.
Infographic courtesy of World Gold Council
I concur with the WGC’s assessment that much of the erosion of the classic inverse correlation between gold and the dollar is attributable to the shifting of demand to the East. When they speak of the move toward a “multicurrency system,” they are referring to the dollar’s ongoing fall from grace as the world’s sole reserve currency.
Beyond the continued movement of physical gold from weak hands in the West to strong hands in the East, we also see the East gaining further influence over the yellow metal via the impending inclusion of Chinese banks in the new London gold fix. Additionally, the rising importance of the Shanghai Gold Exchange and the expected addition of a yuan denominated fix later this year.
Many anticipated that the ascendency of Asia, and China in particular, would be generally supportive to the gold price. There is mounting evidence that it is happening now.
