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Gold (and silver) both shot up today as the US dollar declined. Gold is once again back within sight of its multi-year high from one month ago. Back on 10th July it traded above $1,375 – its best intra-day level since March 2014.

Last month investors piled back into gold as a safe-haven play in the aftermath of the referendum when the UK voted to leave the European Union. Prices subsequently pulled back as investors overcame their knee-jerk “risk off” reaction and adjusted to the new reality. However, what was worth noting about gold’s rally back then was that it happened alongside a bounce in the US dollar. This is unusual as dollar-denominated commodities generally fall in price when the greenback appreciates. The common explanation for this is that the stronger dollar makes such commodities more expensive for anyone needing to make a currency conversion before a commodity purchase. When gold rises in tandem with the dollar it’s a strong signal that investors are nervous. So today’s action (dollar down, gold up) is more commonplace.

There appear to be a couple of reasons for the sell-off in the dollar. Firstly, the euro strengthened following the announcement that Spain and Portugal won’t be fined for failing to get their annual budget deficits back under the 3% limit. Secondly, investors dialled back their expectations for a September rate hike from the US Federal Reserve. Last Friday’s strong Non-Farm Payroll numbers were interpreted as making a hike more likely after next month’s meeting. But yesterday’s weak productivity data suggested that the central bank could easily hold back until the end of the year, once the Presidential election is out of the way. With every other major central bank still loosening monetary policy, gold is an increasingly attractive investment as the zero/negative interest rate environment reduces the lost-opportunity costs of holding the metal.

PM Bulletin

David: When gold rises in tandem with the dollar it’s a strong signal that investors are nervous.

   
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Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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