To many, a strong dollar coinciding with a rising price is a textbook impossibility.
America’s currency is gold’s chief rival as a safe-haven asset, a secure store of value in times of trouble.
When that trouble threatens to include the dollar itself, the gold price can be expected to rise sharply.
A year of steady increase
This happened in January 1980, as the American government’s authority seemed to be falling apart as a result of the Iranian hostage crisis and rising oil prices.
Gold powered to more than $800 a Troy ounce, worth about $2,360 in today’s money.
Bullion was not quite at those heights this morning, but it was up 1.22 at $1,345.75. And the ? It was higher as well against the euro, up 0.09% at €0.8828.
Nor was this a one-off. One year ago, on 21 February 2018, the dollar/euro rate was €0.8139, while gold traded at $1,328.60.
Three months ago, on 21 November 2018, gold had dipped a little to $1,224, while the dollar had strengthened to €0.8784. But by one month ago, 21 January, gold had risen to $1,278.70, while the dollar was trading against the euro at €0.8796.
Now, both bullion and the dollar are well above their levels of a year ago. What is happening?
On the contrary. There has been signals from the country’s central bank, the Federal Reserve, suggesting an easier monetary policy that may have made bullion more attractive as an asset relative to the dollar, given returns on dollar-denominated assets would be likely to decline.
A complicated relationship
This, together with an expected, generally easier stance on interest rates round the world as fears grow of a global slowdown, has helped burnish gold’s attraction.
The dollar may well be drawing support from another source, which is its attraction relative to the euro at a time when the European Union is suffering tensions over Italy’s budget, the Brexit process and immigration.
Gold’s relationship with the dollar is complicated by the fact that gold is priced in dollars. As bullion is a monetary asset, price movements can be seen as either a devaluation or an appreciation of one against the other.
Until 1971, the dollar was fixed against gold, which had been priced at $35 an ounce since the war. But this system broke down as the US printed more money to finance the Vietnam War and social spending at home.
Gold’s attraction for investors is that it is the only asset that does not rely on the promise to pay of a central bank. The disadvantage is that it does not produce an income stream, and often incurs security and storage costs.