Gold to Gain, Revive Inverse Link With Dollar: Chart of the Day
Aug. 5 (Bloomberg) -- Philip Manduca, head of investment at ECU Group Plc, talks about his investment strategy for currencies and gold. He speaks with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)
Gold is set to rally while the dollar is poised to fall, severing a rare positive correlation, amid prospects the Federal Reserve will expand monetary-easing measures, according to Commerzbank AG and UBS AG.
The CHART OF THE DAY tracks the correlation coefficient between gold for immediate delivery and the dollar-euro based on 60-day observations. The reading was recently 0.32 and has been positive since May 19, data compiled by Bloomberg show. The reading was negative for all but six weeks in the prior eight years. A coefficient of 1 means two assets move in lockstep, with a minus-1 reading reflecting opposite changes.
Should the Fed strengthen monetary easing through “unconventional measures,” weakening the dollar, gold will profit from it, Eugen Weinberg, head of commodity research at Commerzbank in Frankfurt, said in an interview this week. “The inverse correlation is likely to return since gold is also performing as currency.”
Spot gold, which touched a record $1,265.30 an ounce on June 21, traded at $1,195.29 an ounce as of 10 a.m. in Singapore, taking this year’s gain to 8.9 percent. The dollar traded at $1.3178 per euro, weakening 10 percent from a four-year high of $1.1877 in June. Speculation that the Fed will resume bond buying has intensified since Chairman Ben S. Bernanke said July 21 that the outlook for the world’s largest economy “remains unusually uncertain.”
The dollar and gold have been in demand in the past months, showing their positive correlation, as investors sought a refuge from Europe’s financial turmoil. Further expansion of the Fed’s balance sheet and its implication for money supply could see gold extend gains and lose its positive correlation with the dollar, said Edel Tully, an analyst with UBS in London. Gold is on course for a 10th consecutive annual gain, the longest streak since at least 1920, Bloomberg data show.
The dollar as a safe haven is being challenged by a recovery in the euro-area economy. A report last week showed business confidence in Germany unexpectedly climbed to a three- year high and monthly purchasing managers indexes for Europe published yesterday said growth in services and manufacturing industries accelerated in July.
(To save a copy of the charts, click here.)
To contact the reporter on this story: Kyoungwha Kim in Singapore at Kkim19@bloomberg.net Lee J. Miller in Bangkok at lmiller@bloomberg.net
Rate this Page