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Gold, dollar link a myth? Posted: Wed, 14 Sep 2005 [miningmx.com] -- SOUTH African economists have joined the debate regarding a breakdown in relations between the dollar and the gold price claiming that the relationship was never a firm one. The general rule of thumb is that when the US dollar weakens, the dollar gold price moves upward. However, analysts have recently postulated that a breakdown in this inverse relationship may be occurring. Not all agree. “To suggest a decoupling implies that there was a robust correlation between the US dollar and the dollar gold price to begin with,” said Standard Bank chief economist, Goolam Ballim. “Over the past ten years, the link between the gold price and the dollar has not been particularly strong despite assumptions to the contrary. In the last five years the correlation has broken down on numerous occasions so the bottom line is that the correlation is far from faultless,” Ballim said. Citing an example, Ballim said that in the first half of 2005, there was a more than 70% correlation between the values of the US dollar and the dollar gold price. However since June the correlation has lost strength. The assumption that the gold price invariably responds to the US dollar does not always work. “From time to time the gold price also rises in tandem with other commodity prices. This may be more as a result of robust global economic growth rather than negative sentiment over the US economy and the US dollar,” Ballim said.“A rise in the dollar gold price is generally seen as an anti-US dollar trade. However, in June with the ‘no’ votes in Europe, the rise in the dollar gold price may have been more of an anti-Euro signal”.
Absa economist, John Loos, was similarly doubtful. “I would say that the link is very vague,” he said. “When the value of the dollar changes it obviously leads to a re-pricing of gold in dollar terms.”
In other words, if the dollar weakens it means more dollars are needed to buy an ounce of gold. The so-called ‘link’ is therefore questionable since the real value of the dollar gold price would not have changed. The real challenge is to find a method of quantifying the real value of the dollar gold price, Loos said.
“To my knowledge, no one has calculated a fool-proof method of calculating the real dollar gold price,” he said. “From this you would be able to see how the real gold price fluctuates against the real dollar and only then would you be able to see if there truly is a link.”
Instead of trying to fathom the link between the dollar and the gold price, investors should rather be taking their cues from Asia, Ballim said.
“The economic dynamism in Asia, particularly in China and India, should be uppermost in the minds of investors,” he said. “This is a far more significant factor than either the dollar or the oil price.”
Yet there is a traditional body of support for the notion that the fortunes of the dollar and the gold price are more closely linked than imagined by Ballim and Loos.
Said Chris Hart, an economist for South Africa’s largest bank, Absa: “The traditional trend is that a strong US dollar implies a weak gold price but over the past few years gold has diverged from that particular trend.
“The trend is still there but it is getting weaker, which may suggest a ‘delinking’ is occurring between the gold price and the US dollar.”
JPMorgan also speculated that gold might be decoupling from the US dollar in a recent research report titled, The Golden Goose.
According to a prominent South African gold analyst the decoupling has already taken effect. “It’s already happened,” he said. “Simply looking at the charts makes this quite obvious.”
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