Gold News

Gold Price Hits Extreme Correlation vs. US Dollar and Real Rates

The GOLD PRICE hit fresh 2023 lows against the US Dollar on Tuesday, touching $1805 before rallying more than $20 per ounce as interest rates edged back from fresh multi-year highs in the bond market after weaker-than-forecast economic data followed last week's strong inflation figures.
Silver prices meantime neared 4-month lows, bottoming at $20.43 early in London before rallying back to unchanged for the week so far at $20.80 per ounce but ending February with a 12.7% loss in the London bullion market, its worst drop since the Covid Crash of March 2020.
"Gold prices continue to trend lower [nearing] oversold territory," said a note overnight from global bank and London bullion market-maker Standard Chartered's precious metals analyst Suki Cooper
"Macro headwinds have continued to build and [shown that] the market started pricing in peak rates and USD weakness prematurely."
With bond prices falling across the board this month on expectations of 'higher for longer' for US Federal Reserve interest rates, the yield on 10-year US inflation-protected securities has risen by 0.3 percentage points, the sharpest monthly rise since September's record 1.0 percentage point jump.
The US currency has also risen this February, adding 2.6% on its trade-weighted Dollar Index and gaining for the first month since September's fresh 2-decade highs against the rest of the world's major currencies.
Chart of gold priced in Dollars vs. the Dollar's trade-weighted index against other major currencies. Source: BullionVault
Gold's negative correlation with the US Dollar has jumped as the precious metal has fallen this month, with the r-squared coefficient of their daily relationship rising above 90% on a 1-month basis, a level breached for only 6 brief periods across the last decade.
"Reports of the Dollar's demise are greatly exaggerated," says an opinion column today from Francesco Guerrera, economics editor for Breakingviews at Reuters.
"In fact, its lynchpin status remains capital markets, trade and debt."
Versus inflation-protected bond yields meantime, gold is now more strongly correlated against 10-year TIPS rates than any time since August 2020, peak of the precious metal's first-wave Covid surge when it set what remains its all-time record 'spot' market high of $2075 per ounce.
On a statistical analysis, the r-squared would read 100% if gold and the 10-year TIPS yield were moving exactly opposite.
Like gold's correlation against the Dollar, that figure has typically read 34% across both the last decade and the last 5 years. Today it comes above 89%.
Chart of gold priced in Dollars vs. the yield on 10-year TIPS bonds. Source: BullionVault
Despite news Tuesday that US house prices are falling and manufacturing activity across the mid-west shrinking faster than analysts forecast, more than 1-in-4 bets on next month's Fed meeting now see the US central bank hiking by half-a-percentage point – up from zero bets at the end of January – after slowing its rate rises to a quarter-point at the start-Feb decision.
For the end of 2023, just 0.6% of current betting on December's decision now sees the Fed finishing the year with its key rate below 5.0%, down from nearly 4-in-5 bets this time a month ago according to the CME derivatives exchange's FedWatch tool.
While the giant SPDR Gold Trust (NYSEArca: GLD) expanded by 0.03% on Monday – the first such growth in its shares in issue for almost 2 weeks – the world's No.2 gold ETF, the iShares Gold product (NYSEArca: IAU) shrank by 0.1% to reach its smallest size since June 2020.
iShares' Silver Trust (NYSEArca: SLV) meantime shrank by another 0.3%, reaching its smallest since early February and smaller by 30% from its record of New Year 2021's #silversqueeze ramp, when bullion prices jumped close to $30 per ounce for only the 2nd time in the last decade.
Contrasting with Western ETF investing, China's gold demand strengthened further on Tuesday according to the Shanghai premium, which reached a 4-month for the gap between Chinese and London bullion prices, offering new imports into gold's No.1 consumer market an incentive of nearly $37 per ounce, the highest in 4 months and well over 4 times its typical level.
Accounting for India's massive gold import duty and taxation, prices in the No.2 consumer market last week edged down to show a $1.50 discount per ounce to London, according to Reuters, reversing the first move into a premium since the global bullion market's 2.5-year lows of early November.
"For physical support, 2022 saw record central-bank demand and we see the de-Dollarization theme continuing to play out, especially the more that de-globalization plays out," said bullion refining and finance group MKS Pamp's strategist Nicky Shiels on a 2023 outlook webinar for the LBMA on Monday.
"We see investment demand re-emerging in 2022 certainly on the view that the US Dollar has peaked after the massive move last year."
Fixing at London's PM benchmark some $100 per ounce lower from the last day of January, gold bullion ended February with a 5.2% loss in Dollar terms, the steepest 1-month drop since June 2021.
The UK gold price in Pounds per ounce meantime dipped through £1500 for the first time since Christmas Week as Sterling extended its gains following the 'Windsor Agreement' with the EU over Northern Ireland's single-market trading relationship, and the Euro gold price also touched a new 2023 low before rebounding sharply to €1720.

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

Please Note: All articles published here are 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. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn



Market Fundamentals