20-Jul (MarketWatch) — Think of it as the breakup. Gold’s historical relationship with the U.S. dollar has been going through a bit of a separation.
The precious yellow metal often trades inversely with the ICE U.S. Dollar Index a gauge of the dollar’s strength against a basket of six rival currencies, as moves in the U.S. unit can influence the attractiveness of gold to holders of other currencies. In other words, gold tends to rise when the dollar weakens.
However, that normally tight relationship has been under some serious stress, lately.
Some market participants point to global central-bank monetary policies and the U.K.’s decision to exit the European Union for the shift in the relationship, which has seen gold, at times, swing higher or lower, despite moves in the buck.
“You can trace the shift to positive correlation between gold and the [dollar] back to the Brexit vote,” Paul Wong, senior portfolio manager at Sprott Asset Management, told MarketWatch.
…“Since the Brexit result, the correlation has been rising to [new] multiyear highs,” said Wong. “Historically the negative correlation between gold and USD was very pronounced—the only time positive correlation occurred was during times of extreme financial stress when both assets were considered to be safe havens.”
That was the case during the financial crisis of 2008, when gold and U.S. dollar traded “hand in hand,” said Nico Pantelis, head of research at Secular Investor.
“Today, the U.S. dollar is trading relatively high, but gold is getting a [bid] as investors are buying gold again in large amounts,” he said. “So today, the price of gold is trading as a function of demand, like it normally should.”
PG View: Today the old inverse correlation seems to have returned. We’ll see if it lasts . . .