Precious Metals Weekly – USD driving gold

by: Georgette Boele

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  • Gold and silver have taken the lead again
  • Growth concerns about the Chinese economy…
  • …and base metal prices weakness hurt platinum and palladium
  • The weaker US dollar is the main driver behind the current gold price strength

Gold and silver take over the lead again

This week, the rally in gold and silver prices continued. The weaker US dollar and some safe-haven demand, because of the tensions between Ukraine and Russia about Crimea, were the main reasons. Precious metals with a strong link to the global economy such as platinum and palladium underperformed. The weaker than expected Chinese data and concerns about Chinese growth resulted in lower base metal prices. This also weighed on platinum and palladium prices. However, the downside was limited, because of the persisting strikes at South African mining companies and concerns about lower palladium supply from Russia.

PM Weekly 13 March 1

What is the main reason behind gold price strength?

In three words: the US dollar. The graph below shows the correlation between gold and equity volatility (grey line), the Dow Jones (green line) and the US dollar (yellow line). The almost neutral correlation between gold and the VIX highlights that the current rally in gold prices is not driven by safe-haven demand. In addition, the relationship between gold and the Dow Jones has evolved interestingly this year. Last year, higher US equities were a major negative driver of gold prices. The reasons behind this were as follow. In an environment of constructive investor sentiment, investors would prefer investments that have more upside potential and also offer income. Therefore, equities were favoured at the expense of gold. Since the start of this year, this strong negative correlation has faded, making gold prices currently more resilient to higher equity prices. So the performance in US equity markets is currently not a major driver for gold prices. So what is the major driver? In three words: the US dollar. Gold and the US dollar generally have a strong negative relationship. However, there are periods that this relationship can turn positive. For example in periods of risk aversion where both gold and the US dollar are bought as safe-haven assets. Currently, the usual negative relationship dominates, which is reflected by a lower US dollar and higher gold prices. If we see a strong recovery in US economic data, this will result in a U-turn of both fortunes meaning higher USD and lower gold prices.

PM Weekly 13 March 2

PM table