(June 2 – 16:55 ET) – Some analysts are puzzled by the rebound in the price of gold this morning on news that interest rate hikes may cease. However, analysts at Merrill Lynch have identified a strong negative correlation between the U.S. dollar and gold that may help explain the action.
Merrill says that since 1993 the price of gold and the U.S. dollar have displayed an 87% negative correlation, and sees recent gold weakness as the flip side of dollar strength. Similarly with the prospect of rate hikes at an end and the U.S. dollar flagging against currencies such as the euro, it is not surprising that gold is ticking up today.
“Our view of the gold market is simple,” explains Merrill, “There is no mythical store of value in gold, rather gold has an easily defined value determined by its long-term marginal cost of production… The reason gold has had, and still continues to have, a place in the financial markets is that gold is the purest commodity of them all…. gold is almost the equivalent of currency.” It says this view has been supported by its recent behavior against the dollar.
On this view gold isn’t lagging because of negative sentiment about its future or central bank sales but by its value against the greenback. It suggests that investors watch gold’s trade weighted price rather than its U.S. dollar-denominated price. It also recommends that investors who expect the dollar to stay high should buy cheap South African and Australian gold companies, while investors who expect the dollar to weaken should look at North American gold plays. Canada’s Barrick Gold is its current top pick in that arena.
-IE Staff