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After appreciating at the beginning of the year, the price of gold has dropped sharply since April and, on 15 August, reached its lowest level since January 2017.
The yellow metal and the greenback
The main reason behind this fall is the strength of the dollar. Since mid-April, the dollar has gone from 1.24 to 1.14 against the euro and it has appreciated against most of the other currencies.
The dollar’s strength is partly due to the good performance of the US economy and the Federal Reserve’s monetary policy tightening, and partly to the context of an increase in risk aversion which has helped the US currency recover its safe-haven status.
In this regard, the current problems in Turkey are indicative: investors fear a contagion effect to other emerging market countries as well as to eurozone countries because of the interconnection between European countries and Turkey. Gold generally (but not always) exhibits an inverse correlation with the dollar.
Two safe haven investments
Depending on circumstances, the yellow metal and the greenback can both take on the role of safe haven. In the dollar’s case, the determining factor is linked to the state of the US economy, especially in relation to that of other regions. The Asian financial crisis and that of the emerging markets in general in 1997-98, a time when the US economy was riding high, spurred the dollar's strong appreciation.
More recently, ongoing doubts about the European construction and the weakness of eurozone growth have contributed to the dollar’s general rising trend over the last seven years. The factors enabling gold to be considered as a safe haven relate to the geopolitical situation, inflation and, more generally, confidence in paper money and in the financial system.
More simplistically, you could say that for gold to be seen as a safe haven, confidence in the dollar needs to be low.
Guy Wagner, Managing Director, BLI - Banque de Luxembourg Investments.
To read this analysis in full and find out more about Guy Wagner’s investment case for gold, click here.
