Thursday, January 15, 2015

A Change in the US Dollar/Gold Relationship?

Usually gold and the US Dollar have what is known as an inverse relationship. This means that if the dollar is strong, gold tends to fall in price in terms of dollars. If the dollar is weak, gold tends to rise in price in terms of dollars. Of course things always change over time, but this is the norm for this relationship. 

Recently it seems like that trend may be changing. For awhile now, BOTH gold and the US dollar have been pretty strong. Most recently gold has been up several days when the US dollar index is also up. Is this just coincidence? Does it mean something else is going on? Let's look at it.


Here are some links to gold price charts (priced in US dollars) over various periods of time in the last year. First take a look at the charts (all charts as of 1-15-2015):

1 year chart - gold slightly down vs. US dollar

This chart covers the last year. This is a time when the US dollar has been in a strong rally upward against other major currencies. Note that it is also up against gold over this time period, but only slightly.

6 month chart - Did the dollar peak versus gold during this time period?

Gold was down the most against the US dollar during this time period. Since gold has moved up against the dollar lately, Did the dollar peak against gold here?

60 day chart - gold reverses against the dollar and moves higher

In the latest two months gold has started going higher against the dollar even as the dollar remains strong against other major currencies. So both have been strong lately.

30 day chart - gold holds the trend 

In this latest 30 days, gold has held its move higher vs. the dollar. Again, even as the dollar has continued to stay strong against other major currencies like the Euro and the Yen.
Concluding comments:

In the last couple of months gold has begun to move higher against the dollar even with the dollar still going up. Over the last year, gold held fairly stable in dollar terms while the dollar made a strong move higher itself. Normally, a big move up in the dollar would have caused gold to go quite a bit lower. We clearly have a trend here where both gold and the US dollar seem to be going higher together, especially in the last couple of months.

The trend is still young so we need to continue to track it. If it holds, what might explain this unusual situation? It is possible that as other areas around the world are struggling (Japan and Europe for example), we may be seeing a so called "flight to safety". Right now the US dollar is still viewed as the world's reserve currency and the perception is that the US is recovering better than places like Europe and Japan. India and China are big buyers of gold all the time. But it may be that gold is attracting buyers from Europe and Japan as well. It may be that BOTH gold and the US dollar are viewed as safer harbors right now by some investors.

This trend may continue for awhile in 2015 so long as the US continues to be viewed as in recovery and with the markets expecting the US Fed to raise interest rates. Gold may still do well as some investors add it as a hedge and India and China continue to buy.

We will track this trend here to see how it turns out. If it continues it would suggest that both Europe and Japan are struggling to stave off deflation and the markets expect them to fight it with easy money policies. This could be a logical reason for both the US dollar and gold to go higher at the same time. We do continue to believe that silver will still outperform gold even if gold makes a move up. This is based on the historically low silver to gold price ratio. We'll follow it here and see what happens in 2015.

added note: Bloomberg article on 2015 gold demand

Update: Gold is up sharply this morning as this article is published. This Reuters article says the sharp move up is related to a surprise move by the Swiss National Bank just announced.The article says QE by the EU could weaken the Euro and cause the dollar to go higher. It says this could limit the gold price rise in US dollar terms. However, that is what we are watching here. If instead, both the US dollar and gold were to go higher, it would indicate a strong "flight to safety" around the world as this article also mentions.

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