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Correlations come and go, but the path
of Euros and gold rarely diverge vs. the Dollar...
"The DOLLAR is not a good store of value,"
says Nobel prize-winner Joseph Stiglitz, finally catching onto the last nine
decades' 95% loss of purchasing power.
"Right now," he told an
audience in Bangkok on Friday, "the Dollar is yielding almost no return
and yet anybody looking at the Dollar has to say there's a high degree of
risk."
Gold also yields nothing, but your risk in the metal is
somewhat lower. At least it will still be a lump of rare, precious, yellow
and shiny metal tomorrow.
Whereas the Dollar...or Euro?
The gold market has been typically quiet
this summer. Whether or not the typical autumn surge will follow, who can
say? But hedge funds have trimmed their futures position, and London dealing
volumes have shrunk, along with volatility.
If the gold market were re-loading its
gun, ahead of a fresh crisis of confidence in everything else, it would
choose just those bullets. Correlations come and go for the gold price,
meantime...now moving with oil, now moving in opposition to stocks. But the
strongest link outside precious metals remains the correlation between the
Euro currency and gold priced in Dollars. And given what's quietly happening
to investment-cash flows into - or rather, out of - the Dollar, that might
come to matter sooner than not.
Daily changes in silver show a monthly
correlation co-efficient of 0.61 with Gold Prices across the last four decades. (That
figure would stand at 1.0 if gold and silver always moved together and by
precisely the same percentage.) The link between Dollar-gold and the Euro is
nearly as strong, averaging 0.51 since the start of 2000 and turning negative
- with Euros and gold moving in opposite directions - on fewer than 12% of
this decade's trading days.
The link has been very strong, reaching
above its current level of 0.90, almost one-sixth of the time. And all told,
that leaves the current state of play as:
- Crude oil correlation: 0.67 (decade average
0.21)
- S&P correlation: 0.28 (decade average 0.08)
- Euro: 0.92 (decade average
0.51)
Typically, the correlation with Euros
can be expected to ease back from the current extreme, but it's unlikely to
go sharply negative should the Euro now rise. So says this decade's bull
market in Euros and gold to date. Which would suggest, in turn, that whatever
comes next for the Euro/Dollar exchange rate, a similar path lies ahead for
the metal - unless the Euro drops sharply while gold holds strong vs. the
Dollar, a mild case of which we got in 2005, followed a severe dose at the
very start of this year.
"Is there any evidence that the
Dollar has been undermined by the credit crunch?" wonders Steven Barrow
at Standard Bank, pretty much to himself. (It really has been a quiet summer
here in London.) "We think there might be and it is to be found in data
on bond and stock purchases by investors..."
Barrow notes that for the Eurozone - the
world's largest single economy, provided you ignore the chasm between Germany
and pretty much each of the 15 other sovereign members, focusing on their
shared currency alone - foreign purchases of bonds, stocks and money-market
instruments has jumped in the last year.
US Treasury data, on the other hand,
shows a sharp decline in foreign purchases of stocks and bonds.
"Whether this reflects weakening
confidence in the Dollar is anybody's guess," Barrow concludes.
"[But] investors have shown a marked preference for Eurozone securities
over US securities. The fact that we have not seen the same surge in net
buying of Japanese securities might suggest the growing elevation of the
Euro's international role - at the expense of the Dollar."
To repeat: A rise in the Euro vs. the
Dollar, on this decade's record at least, would imply rising Dollar-gold
prices as well. But that by itself would hide the deep trend beneath - the
fact gold has outpaced the Euro on top. The single currency has risen 40%
against the Greenback since it was launched a decade ago. Dollar-averse
investors should note that gold's then risen 150% against the Euro as well.
Adrian Ash
Head of
Research
Bullionvault.com
Also
by Adrian Ash
City correspondent for The Daily Reckoning in London, Adrian Ash is
head of research at BullionVault.com – giving you direct access to investment
gold, vaulted in Zurich, on $3 spreads and 0.8% dealing fees.
Please Note: This article is
to inform your thinking, not lead it. Only you can decide the best place for
your money, and any decision you make will put your money at risk.
Information or data included here may have already been overtaken by events
– and must be verified elsewhere – should you choose to act on
it.
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