Nor 100% about the Dollar. Just in
time for Goldman Sachs to catch on...
NICE to see Goldman Sachs spotting what matters 3 months late.
"It is tempting to blame the rally
in gold prices on recent events in North Korea," says a note from the US
investment bank's commodities team under Jeffrey Currie.
"But...real rates and the US
Dollar...explain 85% of the price movement."
Real rates here mean the yield offered on
US government bonds after you account for the pace of inflation. The US
Dollar means the greenback's value against what Goldman calls "a
basket" of emerging-market currencies.
But forget that 85% for now. Because even
before Pyongyang began lobbing out missile tests...and back before it was
only threatening to tweak Donald Trump's nose in early August...gold had
already moved to a new record-close relationship with the yield offered by US
bonds, adjusted for inflation.
Or rather, a record-strong inverse
relationship.
Typically moving in the opposite
direction, the price of gold was never more about real interest rates than it
was over the month to mid-June.
Since then however, the relationship has
weakened – albeit a little – just in time for Goldmans to catch on.
Still, like Goldman almost says, the gold
price's latest action continues to oppose the direction of real US bond
yields like (pretty much) never before.
Our chart above shows the rolling 1-month
average of the rolling 1-month correlation. It would read +1.0 if gold prices
and inflation-adjusted bond yields moved together in perfect lockstep. It
would read -1.0 if they moved perfectly opposite to each other.
And on the 8th of the 8th their 1-month
correlation reached -0.92, a new all-time low on the available 15 years of
data, before edging back to -0.70 as Kim's bombs splashed into the Pacific at
the end of August.
Weekly data meantime show that, on a
rolling 5-week basis, the correlation of gold prices with real inflation-adjusted
US bond yields has not risen above zero for more than 12 months – the
longest-ever stretch since 2002 – averaging a record -0.77 over that period.
Last week the 5-week correlation fell
below -0.90 as gold prices jumped and inflation-adjusted US interest rates
fell, both reaching levels last seen before Donald Trump won the US
presidential election last November.
"I doubt very much that North Korea
is going to back down," says David Govett at brokers Marex Spectron in
London, "and I also doubt that Trump will keep quiet.
"[But] the Fed are also helping
gold's cause by talking down interest rate rises and keeping the Dollar
weak."
Conclusion? "All in all," says
Marex, "this market is 100% governed by news and the Dollar."
You might wonder what else there is.
Besides, of course, the all-important direction of real US interest rates.
But the Dollar really does count for the gold price. Albeit slightly less
than the all-time record connection hit in the middle of last month.
Here again, gold's relationship with a
key US variable hit a fresh all-time record earlier this year. Again, it has
moved away from it since then.
The daily correlation between gold priced
in Dollars and the Dollar's value in Japanese Yen hit a record low of -0.99
this April. On a rolling 12-month average, it has moved ever-more negative
since then, falling from -0.74 five months ago to touch -0.83 last week.
But this relationship – mirroring the Dollar's
value against the Yen, currency of what used to be the world's 2nd largest
economy and the largest economy with a four-decade history of freely floating
exchange rates – has suddenly weakened.
Between 25 August and 6 September the
1-month correlation (daily basis) has risen from -0.93 to -0.51, touching its
least negative level since start-March.
How come? Step forward prime suspect Kim
Jong-un. Firing his missile test across Japan has capped the Yen even against
the fast-falling Dollar. But from a negative correlation this strong – very
nearly perfect this spring, and still stronger than the positive daily
correlation of gold with silver prices – a retreat looks statistically
likely, if only short term.
In short, gold was in summer 2017 pretty
much entirely about the United States' Dollar and the real rate of interest
offered by its debt, even as the headlines screamed about North Korea's
nuclear tests and stand-off with Trump.
Note the past tense. Real rates and the
Dollar will struggle to account for so much of the movement in gold prices
from here. Something else will likely pick up the slack. Something perhaps
like that nuclear stand-off between Pyongyang and Washington.
