Gold and the dollar have become competing flight-to-safety type assets.
The inverse relationship of recent years has weakened to the extent that both the dollar and the gold can finish the day up without the expectation that the other is down.
Since the start of February gold has become less and less responsive to the dollar’s appreciation. This phenomenon appears to be losing its reliability, however. This pattern was repeated during the 1 st Iraqi War, the 2 nd Iraqi War & the Asian defaults. As fears subsided gold and the dollar went back down in value but gold fell farther. When Long Term Capital Management imploded in 1998 the gold and dollar moved upward in tandem as investors fled to safe assets. Gold and the dollar have a long-standing relationship, and while they normally trend in opposite directions they both tend to rise together during crises. Looking at the above graph one can observe the close correlation between gold and the dollar, albeit in opposite directions. Speaking of currency, seasoned traders may have noticed the decoupling of gold and the dollar’s inverse relationship. The strength of the bailout will be measured less on its ability to recoup losses from Greece than its success in staving off additional aid requests from the rest of the PIGS. However the crisis gets resolved the question remaining is not whether the euro will drop, but by how much. Sweden, for example, does not use the euro but is willing to contribute. EU member states remain divided on the terms of the bailout and whether there should even be a bailout, not to mention the bureaucratic nightmare of organizing an aid package from such a wide coalition of interested parties. EU leaders have pledged their support for Greece but it is unclear what this support will consist of and to what extent the IMF is going to get involved. If for some reason Europe decides to let Greece default (unlikely) its economy will crash and drag down the euro as the reverberations ripple through the surrounding countries. Logistical details of the bailout remain murky, but continuing details about currency swaps and Greece’s accounting adventures should give the market a better idea of what to expect. Workers took to the streets in protest over budget cuts last Wednesday and public sentiment has been growing more poisonous by the day, punctuated by a bombing outside JPMorgan in Athens. Let’s take a look at a couple of scenarios and their impact on gold: Gold has been strengthening against the euro through the last couple of weeks and shows signs of decoupling from the dollar. Truth be told, it is hard to picture a scenario that is bearish for gold in the short term. The dollar’s showing signs of weakness, China’s lumbering in the distance, and speculative shorts are running for cover.Īfter bottoming out at $1050 just slightly over a week ago gold is back on the climb, and appears ready to go farther.
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