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Gold’s Relationship With The U.S. Dollar Is Complicated - WGC

By Neils Christensen of Kitco News
Thursday March 26, 2015 10:48 AM

(Kitco News) - Gold still has an important role to play in an investor’s portfolio, even as the U.S. dollar holds near 12-year high, according to the latest research from the World Gold Council (WGC).

In its latest Gold Investor report, the WGC looks at the relationship between gold and the U.S. dollar. In an interview with Kitco News, Juan Carlos Artigas, director of investment research at the WGC, said that because of a general negative correlation, short-term strength in the U.S. dollar is expected to continue to weigh on gold prices.

However, he added that gold plays a much more complex role in the global marketplace.

“The U.S. dollar-gold relationship has evolved and continues to do so. Changes in global markets and the structure of the gold market should soften the dollar’s influence on gold in the long run,” he said in the report. “And while the fact that the gold price is quoted in U.S. dollars gets a lot of attention, its relevance is overstated.”

Image courtsey of the World Gold Council

Artigas said the council sees gold playing a vital role in this particular environment as the U.S. dollar shows signs of peaking, equity markets are becoming over-valued as they head into bubble territory, and bond yields remain near-all time lows.

He added that if the U.S. dollar does top out it could cause a significant correction in equity markets, leaving investors vulnerable.

“We recommend investors use gold to balance the risks in their portfolio,” he said. “In previous years, investors relied on bond yields to provide that insurance but with yields where they are at, they aren't going to be able to provide that same type of cushion.”

According to the council’s research, the optimal amount of gold investors should hold in their portfolio, in a strong U.S. dollar environment, is about 3.8%. In a further breakdown, 5.9% of the portfolio should be in commodities, 16.4% should be in European, Australasia and Far East (EAFE) equities, 36.9% in U.S. equities, 33.6% in U.S. bonds and 3.4% in cash.

Artigas added that outside of the U.S., investors are seeing the benefits of holding gold as an insurance policy. Although gold has dropped in value against the U.S. dollar, it has made significant gains against other global currencies, he said, resulting in strong international coin and bullion sales.

He explained that this diversification outside of the U.S. is one of the reasons why the relationship between gold and the U.S. dollar is asymmetrical, meaning that gold rises more on a weaker U.S. dollar than it falls on a stronger U.S. dollar.

Earlier this month gold fell to a four-month low, however, price data shows that it was still one of the best performing commodities, especially compared to most base metals, silver and oil.

This diversification remains evident in Asia as demand in China and India are expected to remain strong by historical standards, said Artigas.

“The trend eastward is visible as the global gold market evolves with Asian countries such as China, Hong Kong, and Singapore playing a more active role,” the report said. “This will likely lead to more gold transactions being settled in non-dollar currencies…”


By Neils Christensen of Kitco News; nchristensen@kitco.com
Follow Neils Christensen @neils_C



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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