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Gold Correlations and Ratios All Out Of Balance

By:
Barry Norman
Updated: Aug 30, 2016, 06:40 UTC

Gold did an about face towards the end of the US trading session and recovered losses that lingered since the Asian markets. Gold is trading at 1321 flat

Gold Correlations and Ratios All Out Of Balance

Gold did an about face towards the end of the US trading session and recovered losses that lingered since the Asian markets. Gold is trading at 1321 flat to Friday’s close. Gold dropped after FOMC Fischer was much more hawkish then his boss just hours before. In a strange maneuver gold and the dollar moved in the same direction. The greenback climbed to 95.61.

There is a definite correlation between the price of gold and that of the US dollar as well as a correlation between gold and silver. Gold and the US dollar move in opposite directions where gold and silver keep pace with each other. When their ratio is out of line there is an indication that there is a market imbalance. When the ratio is rising, it means gold is outperforming and silver is underperforming. When the ratio is falling, it means silver is outperforming and gold is underperforming. At present the price of the two metals are shadowing each other but the ratio is declining.

gold price out of balance

“There are various reasons why the asymmetry between gold and the dollar exists. Analysts 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.”

Comparing the rate at which central banks bought assets to expand their balance sheets and gold price changes shows a correlation, according to Deutsche Bank’s analysis team. And the pace of balance-sheet expansion, by 300% since 2005 according to the analysts, indicates that gold could be worth more.

gold silver ratio

They wrote in a note on Friday:

“Let us be clear; we are not saying that gold will trade up to 1,700 in the near term, but when viewed against the aggregated balance sheet of the “big four” global central banks (the Fed, ECB, BoJ and PBoC) the argument can be made if we view gold as a currency, the metal is worth closer to 1,700 versus the spot price of 1,326”

There were only two times in the past decade when this relationship broke down, they wrote.

The first time was during the Great Recession, when central banks sold their gold reserves to meet liquidity requirements. And the other time was in 2013, when the Fed signaled that it was winding down its massive quantitative easing program involving asset purchases.

gold prices

There was no physical reason to the fall in the gold prices this Monday morning. No sales took place from either the SPDR gold ETF or from the Gold Trust. This makes the fall in the gold and silver price vulnerable. On Friday the gold price did begin to recover fast and hit 1,336 after hitting a low of 1,322. But then it was slammed down again quickly in a short time back to 1,322 where it closed. All of this fall was due to High Frequency Trading. But no buyers came in to take it back higher after the expiry on the months Options and Futures. The best way to summarize the action is that dollar strength hit all currencies and gold, but not silver.

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