The Dollar And Gold: Not Always Asymmetric

SPDR Gold Trust (ETF) GLD, the world's largest bullion-backed exchange-traded product, is up 24.4 percent year-to-date, while the ETF that acts as a proxy for the U.S. Dollar Index is off 4.5 percent. And for some investors, the equation is that simple. Gold rises when the dollar falls. When the greenback is strong, gold and other dollar-denominated commodities suffer.

Historical data confirm that over the last 45 years, gold performs well when the dollar languishes, is solid when the dollar is flat and loses ground when the greenback gains momentum. There are reasons this relationship exists.

Why The Relationship?

“There are various reasons why the asymmetry between gold and the dollar exists. We believe that two of those reasons stand out,” according to State Street Global Advisors research. “First, gold is one of the multiple currencies that exist in the monetary system, as its use by central banks in their foreign reserves makes clear. So, the link between gold and the dollar should not be seen in isolation, but in relationship to other currencies as well. Second, while important, the dollar is just one of the many drivers that influences gold, and that complexity can alter the negative correlation between the two.”

Related Link: The Crowded Gold Trade Gets Thinned Out

For gold bugs, there is nothing wrong with safe-haven demand, and 2016's market action is, to this point, reminding investors of gold's utility. In fact, gold has proven its mettle during market crises ranging from the Soviet sovereign debt crisis to the Long Term Capital Management meltdown to the global financial crisis.

Further boosting the case for gold is weak earnings growth in the United States and low and negative yields on sovereign debt throughout the developed world.

Not So Fast...

However, it is also worth noting that gold and the dollar do not always move inversion of each other. Both are considered safe-haven assets, so there are times when such assets are in favor, that the dollar and gold rise in unison.

“In periods of uncertainty, the dollar typically benefits from flight-to-quality flows. But so does gold. At such times, both the price of gold and the dollar can go up. Investors have seen this in recent years, including during the 2008–2009 financial crisis, the 2010–2011 European sovereign debt crisis or, more recently, in the aftermath of the UK referendum to leave the European Union,” added SSgA.

As SSgA confirm, gold's historical correlations to other asset classes, namely stocks and bonds, is low, increasing the yellow metal's allure as a portfolio diversifier.

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