first majestic silver

Weakening US dollar could spark major change in gold market

December 15, 2013

UAE (Dec 15)   Year to date, the average gold price is $1,452/oz, which is 13 per cent less than the average peak price in 2012 ($1,669/oz). With the current global economic volatility, there is no consensus on the future direction of gold prices, with some analysts predicting a return to 2012 highs, while others see a continued decline.

On April 15, gold prices fell by 9.3 per cent to $1,180 – the biggest two-day drop in more than 33 years – caused by investors seeking to move their holdings to other assets with higher yields. Changes such as this have increased attention to the volatility of gold and the role that investment demand plays, accounting for more than 40 per cent of total gold demand.

One significant trend that has been largely ignored in the past is the effect that a weakening dollar could have on gold prices. According to a Bloomberg report, over the past five weeks, compared with ten major traded currencies (including CHF, GBP, EUR etc), the US dollar has fallen continuously, heralding the longest stretch of decline since April 2011.

Gold prices are approximately 1.4 per cent down over the past 60 days in dollar terms. However, gold is between three per cent to five per cent down in other currencies – ie CHF, GBP, EUR (source: Kitco). The major cause for this can be attributed to the lack of tapering of the US government’s quantitative easing programme, as well as the shutdown of the US congressional committee and part of the government’s executive arm.

In the short term, traders will hedge their exposure to foreign exchange volatility, but what would happen if traders take a long-term view that the dollar will continue to depreciate against other major currencies? Gold consumption is now dominated by Asia and global traders selling into these markets could look for other currencies to gain value from the relative strengthening of a currency against the dollar.

In the UAE, traders can gain exposure to other currencies through the Dubai Gold and Commodities Exchange, which offers currency pairings for most major currencies. If the US government fails to reach an agreement on raising its debt ceiling or fails to show signs of stabilising its monetary issues, we could see significant changes, as traders may find trading gold in other currencies more attractive. Of course, the dollar is not living in a bubble and reactions to economic conditions in other major markets will continue to play a role. Perhaps, for the first time since the Nixon Shock in 1971, the US dollar value could be an issue in the development of the gold market.

(Courtesy of Ahmed Sultan bin Sulayem)

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