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Reg Howe: Gold derivatives are skewing the world
By Jamie McGeever
Reuters
Thursday, June 16, 2005
http://www.reuters.com/financeQuoteCompanyNewsArticle.jhtml?
duid=mtfh96466_2005-06-16_14-39-54_n1448979_newsml
NEW YORK -- Collapsing confidence in the euro has become one of the
principal factors behind the breakdown in the close correlation
between gold prices and the dollar, suggesting gold may become
something of a currency of choice this summer.
The euro's 2005 decline has accelerated in the last three weeks after
voters in France and the Netherlands rejected a proposed European
Union constitution, which has raised question marks over the drive
for broader European political unity.
The resulting political crisis in Europe has been one of the main
factors driving the dollar higher, normally a condition of lower
dollar-denominated gold prices, and decoupling the relationship
between the euro and gold.
Yet gold, whether priced in dollars, euros or yen, has strengthened
markedly in the past few weeks leading some analysts to say that it
may now be emerging as a genuine investment alternative in its own
right.
"To me, it's one of the most interesting things to happen in the gold
market for a few years," said John Reade, precious metals analyst at
UBS in London. "The performance of gold means you can make the case
that gold's now a genuine diversifier (asset) of the dollar."
Reade, while wary of buying into that argument, could be brought
around if the recent movements in the euro and gold are sustained.
The euro has fallen around 4 percent in the three weeks since French
and Dutch voters rejected a proposed European Union constitution in
their respective referendums. The dollar index , a flows-weighted
measure of the dollar against a basket of currencies, has risen
around 3.5 percent.
Yet in that time gold has risen by almost 5 percent, hitting a 6-week
high of $434.40 an ounce on Thursday.
The inverse correlation between the dollar and gold prices, or seen
another way, the remarkably close link between gold and the euro,
that has held steady for at least three years appears to be cracking.
"We've seen a de-coupling, mainly because of what's going on in the
euro," said a senior bullion dealer at a bank in New York. This
decoupling is "a little bit of a new phenomenon," certainly not seen
since the dollar started to weaken and gold ticked steadily higher in
early 2002, he said.
Indeed, the close relationship between the euro, dollar and gold in
recent years wasn't just confined to prices and charts on a computer
screen.
Until a couple of weeks ago, many banks traded gold from their
foreign exchange desks, the dealer said. Now, however, the moves in
gold and currencies have unnerved many traders, leading to a decrease
in banks' proprietary gold trading and increase in investment fund
activity.
"People are unwinding large (euro) positions," and gold is
benefiting, the dealer said.
The inverse relationship between the dollar and gold in recent years
results from the fact that gold is normally denominated in dollars.
With the dollar falling in value in the three years to January this
year, gold, in dollar terms, moved up.
But the dollar is rebounding sharply this year. With the euro probing
fresh nine-month lows this week, gold in euro terms is hitting record
highs, trading above 357 euros an ounce on Thursday. Gold also hit a
12-year high in yen terms this week, said Reade at UBS.
Brian Garvey, senior currency strategist at State Street in Boston,
however, doesn't see in gold's broad-based rise, including against
the dollar, a vote of confidence in the U.S. currency.
"In short, gold has become the currency of choice," Garvey
said. "Even though the dollar's rally has been impressive lately,
it's a reminder that potentially there are longer- term structural
issues in the background that investors are concerned about."
Technically, gold remains in an uptrend and the euro in a downtrend,
analysts say, suggesting that the moves of recent weeks can continue.
Gold is often seen as a hedge for investors against inflation,
political instability or gyrating financial markets. With political
uncertainty dominating the Europe, it seems it's the euro investors
are fleeing from, a move that benefits gold.
"The safe-haven flow is moving from the euro to gold and other
commodities," wrote Peter Schiff, president of Euro Pacific Capital,
a mutual fund in Newport Beach, California, in a research note this
week.
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