Gold Price Can Rise Once Its Euro Correlation Fades

Analysts at Nomura believe that, despite the recent price drops, gold's time is coming. Gold does best when it is inversely related to the Euro and right now the correlation is on a clear downtrend. Once the relationship is inverse, gold will join the dollar as a safe haven from the European storm.

By David Cottle
May 16, 2012, 9:44 AM GMT
Wall Street Journal

Thanks as usual to the euro zone and its long Greek tragedy, assets perceived as safe havens aren’t exactly hard to sell right now.

That dwindling, disparate club of top-rated sovereign borrowers sees its bond yields flirt with record lows almost daily.

And yet, the oldest haven of the lot, gold, has arguably failed to share fully in this rush for cover. As Greece began to languish again, it was the dollar not the yellow metal that made hay.

It still is.

“Buy the dollar and find a place to hide,” advised Societe Generale’s strategist Lauren Rosborough as Wednesday’s session got under way in London. Gold gets no such vote of confidence, at least not yet.”

Perhaps investors recall the last bout of widespread euro gloom, back at the end of 2011. Then a gumming-up of the European banking system left dollars a rare commodity in Europe. Perhaps they are all resolved not to be menaced by such illiquidity again.

However, analysts at Nomura think gold’s time might be coming.

They noted a while ago that gold performs best when its correlation to the euro is weak or inverse, specifically its correlation with EUR/USD.

“If we look back over the past few years, the correlation has notably flipped when there have been tensions in the euro area,” they wrote. It seems that gold actually spends much of its time behaving like a risk asset, as far as the euro zone is concerned, only reverting to its traditional haven role in times of extreme stress.

So, what’s the position now?

Well, at the moment the correlation between gold and EUR/USD is on a clear downtrend from the high around 0.6 it reached in January. Now it’s 0.4, or thereabouts, which means gold is still going the same way as the euro, just not as strongly as it did.

If the correlation goes on to flip into negative territory, it will mean that gold has once again joined the dollar as haven of choice from the European storm, and the path higher will be open.

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