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Dollar Strength Drives Up Gold’s Correlation with Risky Assets

Gold futures continued its decline this week after falling 3.7% last week. As of Wednesday Asia open, gold futures is trading around $1,543, falling about 2.6% this week. The dollar index has now risen 12 sessions as of 15 May, up 3% since the end of April while Euro/dollar has fallen 3.8% and gold futures has fallen 6.4%. The 10-year U.S. bond yield, now at 1.767% is approaching its recent low in September 2011.

Euro area Q1 GDP growth was 0% for Q1 2012, barely avoiding a technical recession thanks to Germany +0.5% GDP performance. Manufacturing data in the U.S. however surprised on the upside as New York general economic index rose from 6.6 in March to 17.1 in April, reflecting stronger auto sales and a likely increase in manufacturing strength in the U.S.

Recent dollar strength derives from the fear of a faster than expected Greece Euro exit and the subsequent ramifications for Europe. As the Greek country leaders failed to form a coalition government after the 6 May election, new election will likely take place before 17 June, with the anti-bailout Syriza Party leading in votes in a recent survey and calling an end to the bailout terms. Dollar strength is further fuelled when the ECB officials discuss openly for the first time the pros and cons of a Greece Euro exit. EU Treaties do not have an exit procedure for Euro and a country cannot be kicked out if it does not want to. Survey shows the majority of Greek citizens still want to stay in Euro.

For the first 4.5 months this year, gold’s correlation with equities has risen while its correlation with the fear index or S&P500 implied volatility index “VIX” has fallen compared to the same period last year. Last year gold futures have an almost zero correlation with spot VIX and the S&P. This year, gold has a negative correlation with VIX and a positive 0.38 correlation with S&P. This means gold has been behaving more as a risky asset than a safety hedge, at least in the short-term.

Market correction for gold is good for the long-run according to Jim Rogers. Traders are also watching the exchange-traded products level for gold which has still risen 1% this year to 2,379.367 metric tons according to Bloomberg’s data.

Austin Kiddle
Sharps Pixley, London

16 May 2012 | Categories: Gold, Dollar, Euro

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