A WEAKER DOLLAR IS HELPING TO BOOST GOLD -- BUT GOLD IS ALSO RISING FASTER THAN MAJOR FOREIGN CURRENCIES ON CONCERNS ABOUT GLOBAL ECONOMY -- INVESTORS MAY ALSO BE BUYING GOLD TO HEDGE AGAINST AN UNCERTAIN STOCK MARKET
GOLD VERSUS THE DOLLAR... The generally inverse relationship between gold and the U.S. Dollar is one of the best known and reliable intermarket relationships. Part of the reason is that gold is traded in U.S. dollars. Another part is due to the fact that gold is often preferred when investors start to lose confidence in not only the dollar, but currencies in general. Chart 1 compares gold to the U.S. Dollar Index over the last twenty years, and shows them usually trending in opposite directions. The falling dollar between 2000 and 2008 helped push gold prices sharply higher. A dollar bottom in 2011 coincided with a major peak in gold which declined for the next four years (as the dollar rose). A dollar peak near the end of 2016 help stabilize gold which traded sideways for a couple of years. A second dollar peak in the spring of 2020 helped launch this year's strong action in gold which is nearing a test of its 2011 record high.
A CLOSER LOOK AT 2020... The daily bars in Chart 2 give a closer look at the two markets since the start of 2020 (plotted through yesterday). A spike in the dollar during the first quarter as global stock prices plunged pushed gold prices lower. The dollar peaked at the end of March (as stock prices bottomed) and has been weakening since then. The chart shows the weaker dollar helping to push gold prices sharply higher since the end of the first quarter. The chart shows that investors fled to the safety of the dollar during the first quarter. And are now favoring gold over the dollar. They're also favoring gold over other major currencies.
GOLD RISING VERSUS FOREIGN CURRENCIES...When the dollar weakens, most foreign currencies usually rise. And they've been doing that during 2020. But gold is rising even faster. The four lines in Chart 3 plot the price of gold divided by the Euro (blue line), British Pound (red line), Japanese Yen (orange line), and the Swiss Franc (green line). And shows gold outpacing all of them. The red bars in the upper box shows gold quoted in Canadian Dollars also rising. That's significant because the CDW is a commodity currency that does better when commodity prices are rising. One of the hallmarks of a true bull market in gold is that it rises not just against the dollar, but foreign currencies as well. Which is what it's doing now. That also suggests some loss of confidence in global currencies as central bankers around the world are keeping interest rates unusually low to support their economies against the covid-19 pandemic. Low interest rates are good for gold. Investors often view gold as an alternate currency in addition to its role as a safe haven commodity in times of financial uncertainty. Like the present. Which suggests that investors are probably also buying gold (and its miners) as a hedge against an uncertain stock market environment.
