Many have seen the inverse relationship between Gold and the US Dollar and this is not a surprise when gold is priced in Dollars.
Is there more to the relationship than that? And what happens to gold and other precious metals during a recession?
From January 2000 to February 2008, the US Dollar Index fell 30% while the Commodity Precious Metals Price Index rose 250%. That suggests that a weakening in the performance of the US dollar results in a strengthening in the performance of precious metals, and vice versa. That substantiates the findings of a 2006 World Gold Council report which identified an inverse relationship between the US dollar and the price of gold
Assuming everything else is equal, then theoretically, the nominal price of precious metals will adjust to a weakening dollar in order to reflect their ‘real’ intrinsic value.
However, it is also plausible to assume that a weakening in the Dollar, coupled with an increase in global income, especially from emerging market economies, may have contributed to a boost in demand for precious metals at some point during this cycle.
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Anthony Grech, IG Index, in his 2008 ‘Precious Metals’ Report explained that “the dollar generally finds support, and consequently appreciates, during recessions. This occurs because the market is forward looking and immediately starts to factor in an economic recovery”.
Assuming that the inverse relationship between gold and the US dollar holds, a US recession is likely to support the US dollar and this is likely to push the price of precious metals lower.
There is an inverse relationship between the US dollar and the price of silver, platinum and palladium, especially during US recessions.
However, this relationship does not hold for the price of gold. During recessionary periods the price of gold and US dollar tend to rise together.
This suggests that gold is not only a long-term hedge against inflation and a short-term ‘hedge against crises’ but unlike silver, platinum and palladium, a recessionary hedge.
In the long term, however, the findings of the World Gold Council are justified as there is a visible inverse trend between the price of gold and the US Dollar Index.
The above comments do not constitute investment advice and neither IG Index nor Clean Financial accept any responsibility for any use that may be made of them.
Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
'Gold Prices and the US Dollar' by SD, updated 18-Sep-08
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