The OFT-CITED relationship between the Gold Price and the US Dollar's foreign-exchange value points to the metal's role as an "internationally traded currency" according to new research published today.
"Many academic studies as well as market and media reports refer to the negative relationship between gold and the US Dollar," write Fergal O'Connor, bursar of the London Bullion Market Association, and Dr Brian Lucey, associate professor in finance at Trinity College Dublin, in the new Alchemist magazine, produced for members of the LBMA, the professional bullion market's trade association.
The standard interpretation says that the Gold Price moves inversely to the Dollar, rising when it falls and vice versa. But this Gold Price relationship is not specific to the US Dollar, their analysis finds. Looking at the Euro and British Pound as well, "The returns on gold in a currency have a negative relationship with the currency's trade-weighted returns over short, medium and long horizons," the LBMA paper concludes.
A chart, included with the analysis, shows the 1-year correlation of the Gold Price in each of the Dollar, Euro and British Pound Sterling with each currency's trade-weighted foreign exchange value, from 1980 to 2012. All three relationships are strongly negative.
"Gold acts like just another currency," write O'Connor and Lucey. "When the Dollar [or Euro or Pound] is losing value against the majority of currencies, it is also losing value against gold.
"The significance of the negative relationship between [the Gold Price ] and the value of the Dollar then seems to be another pointer towards gold's role as an internationally traded currency, rather than [simply] a way of explaining movements in the value of gold expressed in dollars."
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