A common refrain among gold investors over the past several years has been, gold may be rallying, just not in your currency. This statement has been particularly true for U.S. investors, where periods of dollar strength exacerbated the sideways trading nature of gold since 2013. This trend may be over, with gold prices not only testing its $1400/oz. upper bounding, but rallying strongly across the gamut of major global currencies.
As the chart below depicts, whether dominated in dollars, euros, pounds, yen or Aussie dollars, gold exhibited dramatic gains over the past month, accelerating over the past week. Mathematics aside, just eyeballing the level of co-movement of gold across these currencies is striking.
..whether dominated in dollars, euros, pounds, yen or Aussie dollars, gold exhibited dramatic gains over the past month, accelerating over the past week .
Consider for a moment just how disparate all these economies are, and the specific factors affecting supply and demand for each currency, and yet gold still achieved remarkable gains across the board. Seriously, when was the last time you saw data out of Japan, Australia and the UK all move lock-step? And now, taking this thought experiment a step further, think about the last time this stemmed from a factor as unpredictable as gold. Gold was up 8.9% over the past month on a dollar basis (+$114/oz.), and gold’s performance in other currencies fit this pattern very tightly.
What this trend may indicate is that the level of conviction behind this gold rally is potentially quite potent, powering through the idiosyncratic price action of each currency. The figure below tabulates gold’s performance over the past month and past week, across an expanded set of currencies.
When a flight to safety occurs, safe-haven currencies such as the yen and Swiss franc may generally appreciate alongside gold, resulting in cross-cutting trends in global gold prices. By deviating from this typical pattern, the synchronization of gold prices is a striking phenomenon.
Behind Every Crisis, A Story
Equally fascinating is the story behind this gold rally, a unique confluence of four key macro-economic influences, all supportive to gold. Foremost, Mario Draghi’s Tuesday decision at the European Central Bank for additional accommodation, with 3-year bund rates falling to as low as -77.2 basis points (and you thought us Americans were concerned about low rates!).
Second, Fed Chair Jerome Powell’s announcement Wednesday to “sustain the economic expansion” stoked investors’ expectations of imminent and substantial cuts to the Federal funds rate. As of Monday morning, the market priced in 100% chance of a July cut, and 88.7% of at least two cuts by September—the markets envisioned a greater chance of a return to gold than no cuts at all by September 2020. A third factor is how this dovish outlook for monetary policy prompts a weaker dollar; while gold rallied across the board, some of its most extreme returns were in dollars.
Finally, the shooting down of a $180 million RQ-4A drone intensified geopolitical tensions in the Persian Gulf, adding a further risk premium to gold. This four-fold series of events propelled gold above its multi-year $1400/oz. rut. Remarkable enough, to be sure, but the even more compelling story is gold achieved near carbon copy performance against every other major currency. Confronted with widespread market uncertainty, gold’s hibernation may be over at long last.