Gold News

Anti-Dollar Investing: Gold vs. the Euro

The gold-Euro correlation rarely fails. But that doesn't mean they're equal anti-Dollars...


APPARENTLY,
"The Dollar is not a good store of value," says Nobel prize-winner Joseph Stiglitz, catching on at last to the last nine decades' 95% loss of purchasing power.

"Right now," he told an audience in Bangkok on Friday, "the Dollar is yielding almost no return and yet anybody looking at the Dollar has to say there's a high degree of risk."

That classic, pre-Dollar alternative – Gold Bullion – also yields nothing. But your risk in the metal is somewhat lower. At least it will still be a lump of rare, precious, yellow and shiny metal tomorrow.

Whereas the Dollar...or Euro for that matter?

The gold market has been typically quiet this summer. Whether or not the typical autumn surge will follow, who can say? But hedge funds have trimmed their futures position, and London dealing  volumes have shrunk, along with volatility.

If the gold market were re-loading its gun, ahead of a fresh crisis of confidence in everything else, it would choose just those bullets. Correlations come and go for the gold price, meantime...now moving with oil, now moving in opposition to stocks. But the strongest link outside precious metals remains the correlation between the Euro currency and gold priced in Dollars. And given what's quietly happening to investment-cash flows into – or rather, out of – the Dollar, that might come to matter sooner than not.

Daily changes in silver show a monthly correlation co-efficient of 0.61 with Gold Prices across the last four decades. (That figure would stand at 1.0 if gold and silver always moved together and by precisely the same percentage.) The link between Dollar-gold and the Euro is nearly as strong, averaging 0.51 since the start of 2000 and turning negative – with Euros and gold moving in opposite directions – on fewer than 12% of this decade's trading days.

The link has been very strong, reaching above its current level of 0.90, almost one-sixth of the time. And all told, that leaves the current state of play as:

  • Crude oil correlation: 0.67 (decade average 0.21)
  • S&P correlation: 0.28 (decade average 0.08)
  • Euro: 0.92 (decade average 0.51)

Typically, the correlation with Euros can be expected to ease back from the current extreme, but it's unlikely to go sharply negative should the Euro now rise. So says this decade's bull market in Euros and gold to date. Which would suggest, in turn, that whatever comes next for the Euro/Dollar exchange rate, a similar path lies ahead for the metal – unless the Euro drops sharply while gold holds strong vs. the Dollar, a mild case of which we got in 2005, followed a severe dose at the very start of this year.

"Is there any evidence that the Dollar has been undermined by the credit crunch?" wonders Steven Barrow at Standard Bank, pretty much to himself. (It really has been a quiet summer here in London.) "We think there might be and it is to be found in data on bond and stock purchases
by investors..."

Barrow notes that for the Eurozone – the world's largest single economy, provided you ignore the chasm between Germany and pretty much each of the 15 other sovereign members, focusing on their shared currency alone – foreign purchases of bonds, stocks and money-market instruments has jumped in the last year.

US Treasury data, on the other hand, shows a sharp decline in foreign purchases of stocks and bonds.

"Whether this reflects weakening confidence in the Dollar is anybody's guess," Barrow concludes. "[But] investors have shown a marked preference for Eurozone securities over US securities. The fact that we have not seen the same surge in net buying of Japanese securities might suggest the growing elevation of the Euro's international role – at the expense of the Dollar."

To repeat: A rise in the Euro vs. the Dollar, judging by this decade's record at least, would imply rising Dollar-gold prices as well. But that by itself would hide the deep trend beneath – the fact gold has outpaced the Euro on top. The single currency has risen 40% against the Greenback since it was launched a decade ago. Dollar-averse investors should note that gold's then risen 150% against the Euro as well.

Ready to Buy  Gold...?

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver, platinum and palladium 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.

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