The corrective strengthening of the US dollar seems to dominate the currency market in recent days. In the past, the strengthening of the USD may have correlated with declines in gold prices, but now this relationship does not seem to exist, and gold remains above $1700 per ounce for another day in a row.
The main currency pair EUR/USD has fallen in the last month from the region of 1.2200 to near the level of 1.1800, the lowest since the second half of November 2020. In contrast, the gold price has risen from around $1,680 to over $1,730 since the second week of March, clearly breaking, at least in the short term, the correlation with the US dollar. Nevertheless, the gold market is still struggling to find an excuse for a stronger upward impulse.
A recent interview with the chief gold strategist at State Street Global Advisors (the firm has $3.5 trillion under management) suggests that investors are unhealthily focused on 10-year bond yields. Strategist George Milling-Stanley added that once the focus shifts away from the bond market, he expects gold prices to continue to rise. The 10-year bond yield recently reached a 13-month peak, which is the biggest risk to the gold market. George Milling-Stanley said that despite this, he is not convinced that the sell-off in the bond market could be sustainable in the long term.
The U.S. economy has seen a sharp recovery from the worst pandemic shock last year. However, it may still be some time before it returns to its pre-pandemic state. In this environment, the Federal Reserve may continue to maintain ultra-accommodative monetary policy and keep interest rates near zero. Meanwhile, low interest rates, especially historically low real interest rates, are just one factor that could play a significant role in gold prices. On top of that, there is likely to be a larger deficit and higher debt, which could translate into USD depreciation in the long run. All this together may have a positive impact on gold, which could still return to the uptrend after the correction started in August and the exit above $2,000 per ounce.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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