(Bloomberg) — Emotion is trumping the dollar in the gold market.

Every quarter for the past three years, the metal has moved in the opposite direction of the currency. That trend is being upended in 2015. Investors have bought bullion as a hedge against political turmoil in Europe, even as the dollar rose on prospects of higher U.S. interest rates. The inverse correlation between the two assets, which in December was the strongest in a year, is now half of its average over the past decade.

The risk of a default by Greece that could unravel the European Union helped fuel demand for gold as a haven and boosted market volatility. While bullion pared some gains this month as Greece negotiated an extension of a bailout package, holdings in exchange-traded funds backed by the metal rebounded from a five-year low in mid-January to the highest since October, even as the Federal Reserve signals its first interest-rate increase since 2006.

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“Gold at the moment is being driven by the fear factor — it rises when euro-zone uncertainty increases, and falls when it decreases,” Rene Hochreiter, a mining analyst at Noah Capital Markets (Pty) Ltd., said by phone Tuesday from Johannesburg. “Last year, gold’s fate was much more tightly bound to the dollar and the outlook for quantitative easing, but that trade is no longer the dominant one.”

Price swings for gold have gotten bigger as political brinkmanship in Greece increased. A measure of 100-day historical volatility is at 18.1, near the highest in a year, according to data compiled by Bloomberg. That compares with 11.6 in September, the lowest since 2005.

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2015 Rally

Gold and the Bloomberg Dollar Spot Index rose in 2015, after the metal surged 8 percent in January, the most of any month in three years. In the previous two quarters, bullion tumbled 10 percent while the dollar index surged 13 percent. This month, as the risk of a Greek exit from the EU eased, gold is down about 6 percent on the Comex in New York.

“Gold will typically want to follow an inverse relationship with the dollar, unless it is trumped by something better,” said Ross Norman, chief executive officer of bullion dealer Sharps Pixley Ltd. “In the last few months, we have seen some pretty phenomenal things to trump it including issues in Greece.”

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The 30-day correlation coefficient of gold futures to the Bloomberg Dollar Spot Index is minus 0.19, compared with minus 0.72 in December and a 10-year average of minus 0.41. In January, the correlation was minus 0.1, the weakest since June. A reading of minus 1 means two assets always move in opposite directions.


The dollar’s influence over gold will get stronger later this year once the Fed raises interest rates, said Bernard Dahdah, an analyst at Natixis SA. Higher borrowing costs boost the value of dollar-based assets and hurt the appeal of gold, which generally offers returns only through price gains.

“As we get closer to June, when we expect the U.S. interest rates to rise, the dollar should strengthen and gold prices drop,” Dahdah said by e-mail from London.

Goldman Sachs Group Inc. forecast on Jan. 25 that gold will drop to $ 1,000 by the end of 2016 as the U.S. currency gets stronger and inflation remains muted. ABN Amro Bank NV predicts a slump to $ 800. The dollar will strengthen for at least the next three quarters, according to economist estimates compiled by Bloomberg.

Hard Assets

Speculators are retreating from gold as record valuations for global equities diminish bullion’s appeal as a store of wealth. Money managers cut their net-long wagers by the most since November during the week ended Feb. 17, according to U.S. Commodity Futures Trading Commission data. Short holdings surged 44 percent, the most since August.

The dollar is less of an influence amid concern global central bank stimulus will erode currency values, raising the appeal of owning hard assets like gold. Global holdings of exchange-traded products backed by the metal are up 5.1 percent this year to 1,679.7 metric tons and the U.K.’s Royal Mint said this month that it saw more Greek demand for Sovereign bullion coins.

“Gold is currently being driven by factors outside of the U.S.,” Carsten Fritsch, a commodities analyst at Commerzbank AG, said in a telephone interview from Frankfurt on Feb. 19. “I would expect these European risk factors to continue playing a major role also into the future, keeping the inverse correlation between the dollar and gold weak.”

To contact the reporter on this story: Eddie van der Walt in London at [email protected]

To contact the editors responsible for this story: Lynn Thomasson at [email protected] Nicholas Larkin

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