Do Other Markets Affect Gold?
Gold prices are a result of current supply and demand. The gold market is in a constant state of flux as price discovery takes place. That being said, there are a number of outside markets that can affect the price of gold. Here we will discuss some of these key outside markets:
The U.S. Dollar Index: The dollar index can have a significant impact on the price of gold. One must remember that gold is a dollar denominated commodity. As such, when the dollar is stronger, gold becomes relatively more expensive for foreign buyers. On the other side of the coin, when the dollar index is weaker, gold becomes relatively cheaper for foreign buyers.
The dollar is often discussed in gold market commentary because it has such an impact on prices. While the correlation does not always hold true, if you watch the dollar index against the gold price, you will see that more often than thought these two markets will move opposite of one another.
The dollar has a very far-reaching affect on the gold market. For people in the United States, when the value of the dollar falls so does their purchasing power. In other words, every dollar now buys less goods or services. On the contrary, if the value of the dollar rises, every dollar now buys more goods or services. This is an important factor for the gold market. Gold is often purchased as a hedge against inflation or a reduction in purchasing power. That being said, when the dollar is falling gold may be more attractive not only to foreign buyers but U.S. buyers as well. This will often cause the price of gold to rise.
To see this correlation in action, look at recent charts of the dollar index and gold. You will see that the dollar has been rising while gold prices have been falling.
Crude Oil: Gold prices will at times also move with the price of crude oil. Oil prices have a far-reaching effect on the global economy. Higher crude oil prices can put a dent into disposable income. Higher crude oil prices can translate into higher prices paid at the gas pump. This, in turn, can stoke inflationary fears. Investors may elect to buy gold in order to try and hedge that inflation risk. On the other hand, when crude oil prices are falling, inflation may become less of a concern. In addition, discretionary spending may increase as people have more money left in their pockets due to lower energy costs. The price of gold can potentially fall during periods of lower oil.
Like the dollar index, the correlation between gold and crude oil is evident in recent months. Oil prices have dropped significantly from the $100 per barrel mark to less than $50 per barrel in just a few months. The price of gold has also dropped during this period, and may potentially see further downside as lower oil and a lack of inflation lessen investor worries. One should keep in mind, however, that this correlation will not always hold. Gold may be bought in times of deflation as well as inflation.
Stock Market: The stock market can also have a dramatic impact on the gold market. Stocks have been moving higher for several years now, and gold has not accomplished much on the upside. Coincidence? Not likely….When stocks are moving higher many investors may elect to chase potentially higher returns in the equity market. That being said, gold and other perceived safe-haven assets may not garner much buying interest during stock bull markets. On the other hand, when stocks are moving lower, or in the event of a market crash, gold may see a significant increase in buying interest as investors take money out of equities and look to put that capital to work elsewhere.
This begs the question: Will gold prices find a meaningful bottom when the global stock market begins to reverse course? While no one can see the future, this would make sense. In a world with low interest rates, investors will still seek out returns, and with rates as low as they are, those investors may potentially look to gold and other asset classes.
Like other outside markets, the correlation between gold and equities will at times hold true and at other times diverge.
No correlation is set in stone. Correlations can and do come apart at times. Knowing and understanding gold’s relationship with other outside markets can, however, potentially give gold investors a better handle on the gold market, and may potentially aid in identifying turning points in the market.