Trump Trade Pushes Gold, Dollar Further Apart
Posted by hkarner - 4. März 2017
Source: The Wall Street Journal
The Trump era has brought a lot of polarization. And not just in the capital.
In financial markets, a deeper wedge is being driven between gold and the dollar, two long-standing foes. The pair often moves in opposite directions, a trend that became dramatically stronger starting late last year.
Their negative correlation hovers at -60%, compared with a -32% long-term average, said Suki Cooper, precious metals analyst at Standard Chartered Bank in New York. A Wall Street Journal analysis of the 60-day rolling correlation between gold and the dollar shows the two were recently moving more strongly against each other than any time in the last 13 years.
It started hitting those lows right around Election Day. Gold traders have been closely monitoring the U.S. economic and political environment, concerned about whether a new regime in the White House may lead to global instability, Ms. Cooper said. That overlaps with the historic negative relationship between gold and the dollar, pushing them even further apart.
First, gold is often seen as an asset for nervous times. It rebounded from lows this year amid uncertainty about President Donald Trump’s policies and questions about whether they might cause international conflicts and trade wars.
Second, gold and other dollar-denominated commodities typically rise in value as the dollar depreciates and makes them cheaper for traders using other currencies. Trump’s criticism of a strong dollar and investors’ disappointment about his lack of detailed plans had sent the dollar sharply lower.
Gold’s rally continued in recent weeks even as the dollar started a rebound, but their polarization came back strongly Wednesday, a day after Mr. Trump spoke to a joint session of congress. A positive tone helped assuage some investor fears, Scotiabank analysts said.
Gold started off the session with a severe drop but then pared losses. The dollar did the exact opposite surging to a one-month high before retreating all the way to small losses by late afternoon.
A lot of this trade is also connected to interest rates. The dollar has rebounded, in part, on rising expectations the Federal Reserve will raise rates at its mid-month meeting, with markets pricing in a 71% chance that happens. Rising interest rates also impact gold, as it encourages investors to stop paying to store gold and instead seek interest-yielding bonds.
But even those non-Trump factors add to the divergence between gold and the dollar, at least for now, analysts said. Mr. Trump’s speech lacked the rhetoric on protectionism that might have pushed more investors to gold, Ms. Cooper said. With calmed nerves, they are shifting focus to a Fed that sounds more likely to raise rates, she and other analysts said.
In other words, double the help for the dollar while double the pain for gold.
“In an era with higher interest rates and a rising dollar, that puts a cap on gold,” said Francisco Blanch, head of commodity research at Bank of America Merrill Lynch. “At the end of the day there’s a pro-growth Trump agenda that’s very obvious to everyone. … The more moderate Trump appears in his pursuit of his agenda, the more the market is going to believe it.”