Gold, Australian Dollar Moving in Opposing Directions

Gold, Australian Dollar Moving in Opposing Directions

Gold prices have started to show signs of reversing after posting weakness for most of 2013.  The rebound in gold has come in large part as a result of market speculation that the US Federal Reserve will be unwilling to start reducing its monthly quantitative easing stimulus programs until the end of Q1 2014.  This is a drastic revision in expectations (relative to the initial suggestion that tapering would begin in September 2013) has led to significant declines in the US Dollar.  And since gold is priced in Dollars, gold has benefited despite broad rallies in the major stock benchmarks and the reduced need for investors to find safe haven alternatives.

In recent sessions, gold has posted some of the biggest single-session advances since the middle of October, as the market is seeing less evidence that the Fed will begin changing its stimulus programs before the end of the year (somewhat confirming the bias of the consensus).  This aids the appeal of precious metals and could be the earliest indication of a turnaround in gold markets after what most investors would describe as a disastrous year for the metals space.  But one of the oldest maxims in the trading markets is that “when blood is in the streets, buy property.”  The same applies for metals as well and larger sections of the market have begun to argue that now is the time to capitalize on the current weakness in both gold and silver.

Watching the Australian Dollar

“Since gold and national currencies have such a highly correlated relationship,” said Tony Davis of Atlanta Gold and Coin Buyers, “it is important to monitor activity in these markets in order to get an indication of where metals prices are going next.”  In most cases, precious metals investors tend to monitor activity in the US Dollar.  But while this is an important part of the investment process, this is not the only critical area that sees an impact when gold prices change.  There is an important class of currencies that are characterized as the commodity currencies, as they are tied to countries that are large suppliers of energy and metals exports.   Key examples in this category include the Australian and Canadian Dollars, both of which have seen significant market moves in the second half of 2013.

Strength in the commodity currencies tends to be seen when oil and gold move higher.  So, one of the earliest indicators that we are truly seeing a bullish reversal in metals prices would be seen if the Australian and Canadian Dollars begin to rally.  The US Dollar is currently showing a four-session string of daily losses, which is the worst streak in two month and an implied positive for the currencies.  Going forward, US GDP figures for the fourth quarter will be a key determinant of whether or not these trends will continue.  So far this year, the overall growth performance in US GDP has surpassed market expectations.  But most of this data does not take into account the negative effects of the government shutdown seen earlier in the year.  So, the releases seen into the end of the year could easily disappoint to the downside.

Return to Safe Havens

If this outcome is seen, this would prevent additional obstacles for the US Dollar in its attempts to rally.  This would also weigh on stock markets, as results in corporate earnings would be expected to suffer.  So, which markets would benefit in this case, and where does it make sense to start moving your money?  Dollar weakness would lead to a surge in buying for its major counterparts.  This would include the commodity currencies, and if we remember the positive correlations in the Australian Dollar and in gold it becomes clear that this would be a highly favorable scenario for precious metals.

Falling stock markets mean that investors will need to seek protection in safe haven assets, and gold is the most historically significant instrument in this category.  Broadly speaking, gold is now on a path to post its first yearly loss in 13 years.  With prices trading at depressed levels relative to recent historical averages, it makes sense to start looking for areas to start buying as a means for gaining exposure.  To be sure, we do have some critical event risks in the coming weeks (as US GDP growth will be released in addition to the Federal Reserve meeting, which concludes on Dec. 18).  It will be important to watch the outcomes here, as this could be the central driver in the next major run in precious metals.

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