So far in 2009, gold and the US Dollar have both shot higher in tandem. Why...?
"A STRONGER DOLLAR typically weighs on gold," according to Reuters. But that's not what's been happening so far in 2009. Not by a long stretch.
The US Dollar has gained 6.0% against the rest of the world's major currencies since the end of December. Gold has meantime gained 7.5% vs. the Dollar.
So versus the Dollar's No.1 paper-currency challenger – the Euro – gold just put in its best month-on-month since autumn 1999...up more than 13% inside 21 sessions.
"The market dynamic has shifted in the past couple of weeks and I don't think any commentators or analysts have really picked up on it yet," writes London currency trader Tom Tragett in an emailed note to us here at BullionVault today.
"Upon the release of weak US data," he says of the market's current nervousness, "do the following...
- Sell EUR/USD, AUD, NZD and the Dow. Also sell EUR/CHF
- Buy GBP, Yen and Gold."
Thursday's US housing and jobless data were almost as bad as today's GDP figures are likely to prove. But surely "Bullion typically moves in the opposite direction to the US currency," as Bloomberg keeps saying...time and again.
After all, gold is priced in Dollars. So Dollar up, gold down.
Well, a perfect correlation between two prices – as judged by number-crunching data jockeys – will stand at 1.0 or near as damn it. If they display an absolute non-correlation, in contrast, then the number spat out by the PhDs' spread-sheets will read 0.0. And during the 20 years between 1982 and 2002, the average correlation linking weekly gains in the Gold Price to weekly falls in the US Dollar (and vice versa) and its trade-weighted exchange-rate index ran to just 0.31 – only a little better than hardly-worth-noting.
Gold then switched for a brief period to mirroring the Dollar's fast-fading fortunes on the world currency markets more closely, hitting a phenomenal correlation of 0.96 as the greenback's decline really got busy.
But come the spring of 2005, gold switched again, driving the correlation back down to 0.40 and returning to business as usual.
That's why, as BullionVault wrote back in its 5 Myths of the Gold Market report of May 2007, a US citizen looking to protect himself against the decline of the Dollar would have made three times as much profit holding gold rather than Euros so far this decade.
And right now, "the Euro in particular is reacting very negatively to heightened risk aversion," adds Tom Tragett, "as it is the most actively traded currency versus the US Dollar. Because the new dynamic in risk aversion now means that when the EUR/USD goes up then traders must sell their gold – since a higher Euro implies lower risk in the overall markets and hence less need to hoard the yellow stuff."
Got that? Look at Thursday's sharp drop in gold to $875 an ounce, for instance. Down 4.5% from Monday's 3-month high, it coincided precisely with the Euro rallying towards $1.3200.
The single currency's since dumped more than 3 cents (Friday AM in London). The Gold Price in Dollars has jumped 5.7% to a fresh 3-month high above $925.
"A lower EUR/USD now means you must pile back into gold," says Tom – merely observing, not advising, of course – "as it implies greater risk aversion...which completely flies in the face of what most analysts would have you believe in terms of a higher Gold Price running hand in hand with a higher EUR/USD."
Put another way – or so it seems to us here at BullionVault this Friday morning – the "Great Deflation" trade of buying Dollars to pay down debt and sit tight in cash now also includes Buying Gold as the ultimate depressionary back-stop.
Because the idea that gold is only ever an inflationary hedge is also a Myth of the Gold Market investors and traders would do well to dispel.