The relationship between the value of the dollar and gold has apparently changed of late. For most of the past year, dollar weakness went hand in hand with gold strength, and vice versa. In the past week or so, however, gold has risen (note that gold in the chart is inverted) while the dollar has also risen. I'm not sure I have a convincing explanation of why this is happening or what it tells us. On the surface, gold is rising because geopolitical tensions and trade frictions are rising (e.g., Geithner is bashing the bashing the Chinese for "manipulating" their currency, and Congress wants to insert "buy American" wording into the stimulus package). Why the dollar should also be rising, though, I'm not sure. Perhaps it's just that the dollar in the final analysis is still the world's reserve currency, and so it is the currency of choice when things get ugly.
Friday, January 23, 2009
Dollar up, gold up
The relationship between the value of the dollar and gold has apparently changed of late. For most of the past year, dollar weakness went hand in hand with gold strength, and vice versa. In the past week or so, however, gold has risen (note that gold in the chart is inverted) while the dollar has also risen. I'm not sure I have a convincing explanation of why this is happening or what it tells us. On the surface, gold is rising because geopolitical tensions and trade frictions are rising (e.g., Geithner is bashing the bashing the Chinese for "manipulating" their currency, and Congress wants to insert "buy American" wording into the stimulus package). Why the dollar should also be rising, though, I'm not sure. Perhaps it's just that the dollar in the final analysis is still the world's reserve currency, and so it is the currency of choice when things get ugly.
Financials have been hit pretty hard the last few weeks and I imagine gold is showing strength from the fear factor. The TED spread has increased a bit as well (97 basis pts to 107 pts today).
ReplyDeleteI think there's a general fear of further deterioration of the big financials?
Scott,
ReplyDeleteFirst of all I would like to personally thank you for insights that have been very usefull for me.
If I may, I'd like to give an explanation of why this is happening:
Given the three relative prices.
A) Gold vs. Dollar (Gold Price)
B) Dollar vs. Euro-Pound-Yen (Dollar Index)
C) Euro-Pound-Yen vs. Gold.
From the year 2000-2007 the USD lost value against both EUR and Gold. It was just the dollar that was loosing value. So Gold UP, Dollar Index DOWN.
What is now happening is that the USD is loosing value (againt gold) but the other currencies are loosing value more rapidly.
So Gold UP (because of the dollar debasement), Dollar Index UP(in comparison to other currencies it has strengthend.)
Reasons for this?
I) The 'Flight to safety' made capital go back to the US, so people sold Euro to buy USD, making the USD Index go UP.
II) The worldwide monetary easing made de Gold price go up in every currency.
What is it telling us? Well, the crisis has hit harder abroad than in the US. Stock markets in 2008 have gone down roughfly US:-35% EUR:-50% BRIC:-70%.
scott
ReplyDelete- the answer is in the TIC data from treasury's website. if you look at it, you can see that there was a flood of money that came into the dollar as a 'safe haven'.
- hence the downward move in treasuries, repricing of gold.. etc.
M Vivaldi has a good point.
ReplyDeleteCabodog: Yes, there is still widespread fear of a financial crisis or disaster. I wouldn't attribute much importance to the modest increase in the TED spread however. It is still wide enough to signal significant problems out there (but no insurmountable).
ReplyDeleteScott,
ReplyDeleteOn 11/20/2008 you published 2 charts, "TIPS Valuation" and "Actual vs. Expected Inflation" would you consider updating the charts and add you current comments?
Thank you
zumbador: I'm working on it. Just got back from a quick ski trip to Utah and was unable to tend to the blog as much as I would have liked.
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