Study: Dollar gyrations to light fire under gold price

Why so glum?

While off its 12-year highs just above 100 hit last week the US Dollar Index is still up 21% over the past year.

While nowhere near its peak of the mid-80s, the past year has been the greenback’s strongest run in more than forty years.

Over the past 12 months the dollar has appreciated the most of any 12-month rolling period since 1973.

Conventional wisdom is that the gold price and the dollar move in opposite directions.

The dollar’s all-time peak of 164.7 was reached in February 1985. That coincided with a bottom in the price of gold of $284.25 an ounce.

A trenchant new study by the World Gold Council dissects the relationship between the gold price and the US dollar and suggests that the precious metal may be in for a wild ride.

The study authored by Juan Carlos Artigas, ‎Director of Investment Research at the WGC, shows the correlation between a 12-month period when the dollar moved up by more than 7.5% (or one standard deviation) and the subsequent 12-month period is -0.1.

That suggests that after a period of strong appreciation the dollar tends to revert back to the mean.

The reason the dollar’s gyrations could trigger a huge move in the price of gold you have to consider the study’s central finding: the asymmetrical relationship between the metal and the world’s reserve currency.

And that asymmetry is quite substantial. In fact after analyzing average annualized statistics of gold performance from January 1973 through December 2014, Artigas found gold prices rise twice as much during weak dollar periods than they fall when the dollar strengthens.

Artigas cautions that these numbers do not mean that a strengthening dollar will not hurt the gold price, but even a renewed rise in the US currency will not be all bad for gold.

While a breakup in the euro area or a disorderly default of foreign-issued dollar denominated loans may spark a flight into the dollar says Artigas these kind of events have often boosted gold demand as a store of value.

Gold has already showed remarkable resilience against the rampant dollar – between early 2014 and last week the dollar rose by 20% while gold only fell by 1.2%.

With a possible end to the greenback rally coming closer, the stars may be aligning for the dollar gold price.


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