FALLING BOND YIELDS HAVE BEEN GIVING A BIG BOOST TO THE PRICE OF GOLD -- AND HELPED OFFSET IMPACT OF RISING DOLLAR
RELATIONSHIP BETWEEN GOLD AND THE DOLLAR... Last weekend's message explained that one of the side-effects of a rising U.S dollar is weaker commodity prices. And that's been the case so far this year as a four-month high in the U.S. Dollar Index has pushed commodity price indexes sharply lower. But there is one major commodity market that's actually gained ground along with the dollar. And that's gold. Today's message will attempt to explain why that's happening; and what's actually helping to push the price of gold higher.
THEY USUALLY TREND IN OPPOSITE DIRECTIONS... The weekly bars in Chart 1 compare the price gold (brown bars) to the U.S. Dollar Index (green bars) over the last ten years. And it shows them usually trending in opposite directions. You'll see that turning points in the dollar usually led to turning points in gold in the opposite direction (see arrows). A falling dollar usually corresponded with higher gold; while a rising dollar usually resulted in lower gold prices. That negative correlation between the two is confirmed by the 60-week Correlation Coefficient in the lower box which was negative for most of those ten years. Especially during the years between 2014 and 2018. Then their relationship started to change during the second half of 2018 as both started rising together. The question is why?
WHY THE CHANGE?... Gold started rising during the second half of 2018 while the dollar was also rising (vertical green line). That caused the Correlation Coefficient line to start rising before eventually turning positive by the highest amount in a decade. Why the change? When one intermarket relationship changes, it's usually because another intermarket relationship is intervening. Our next chart will attempt to show what that other relationship might be.
DIRECTION OF BOND YIELDS ALSO INFLUENCES GOLD... The direction of bond yields also impacts the price of gold. That's because gold is a non-yielding asset that pays no interest or dividends. That gives it more value when competing bond yields are falling; and hurts the metal when bond yields are rising. Chart 2 compares the 10-Year Treasury yield (green line) to the price of gold (brown bars); and shows them trending in opposite directions over the last three years. And may explain why the price of gold starting rising during the second half of 2018 (while the dollar was also rising). The chart suggests that the unusually steep drop in Treasury yields from the second half of 2018 to the present has boosted the price of gold; and helped offset the usual depressing impact of a rising dollar.
FALLING YIELD BOOSTS GOLD... Chart 2 shows that the peak in the TNX during the fourth quarter of 2018 (down green arrow) coincided closely with an upturn in the price of gold (rising brown arrow). That downtrend in yields (and uptrend in gold) continued until the end of last August. A rebound in the TNX during the last four months of last year caused the price of gold to weaken. The last two arrows, however, show the latest downturn in the TNX starting in December coinciding with another upturn in gold. That doesn't mean that the recent upturn in the dollar hasn't had a restraining effect on the price of gold. But that restraint has been offset by the drop in bond yields since December.
A CURRENT LOOK AT ALL THREE... The daily bars in Chart 3 show how the three markets have interacted since last August. The lower box shows the price of gold (brown bars) and the 10-Year Treasury yield (green bars) moving in opposite directions during the entire period. Each rebound in the TNX weakened gold; while each TNX downturn gave gold a boost. It also shows that the last downturn in the bond yield during December coincided with another upleg in gold. This is where it gets more interesting. The dollar has also rallied since the start of the year.
DOLLAR RALLY HAS RETRAINED GOLD... Dollar weakness during December may have also lent support to gold; but the U.S. Dollar Index (upper box) has rallied since the start of the year to a four-month high, while gold has also gained ground. But that doesn't mean that the rising dollar hasn't had restraining effect on gold. Although gold has gained +4% since the start of the year, the boxed area shows that the rising dollar has slowed its advance over the past six weeks. So has a modest rebound in bond yields this month. The Dollar Index is nearing a test of its October high. That will be an important test for it, and maybe for gold as well. So will the direction of Treasury yields. And the stock market.
GOLD ALSO REACTS TO STOCK TRENDS... Gold is often viewed as both commodity and a currency. As such, it responds to trends in currency markets and commodities. It also responds to the trend of interest rates as shown above. But it also responds to the trend of stocks. Investors usually buy gold when they're nervous about stocks, or when stocks are in a serious correction. That's why gold and bonds are often bought during periods of stock market volatility. Despite its unusually long bull run and somewhat over-extended technical condition, the stock market is still in an uptrend. But investors have been buying safe haven Treasury bonds since the start of the year, along with defensive stock market sectors like consumer staples, utilities, and REITs. They may be buying gold for the same defensive reasons.
