Weak dollar alone not enough to fuel gold's rally
By Frank Tang
NEW YORK (Reuters) - Even as a steadily declining dollar is enough to drive gold's $40 rally this month, a further rise in bullion will need more flight-to-quality buying to enhance the precious metal's status as a safe haven.
While gold is well-poised to retest 2007 highs on the back of the dollar weakness, a strong resolve by the Federal Reserve to hold high interest rates to fight inflation could take the luster off bullion.
"It needs to be a perception of gold as being a preferred alternative asset. It's not going to go higher just because the euro rallied against the dollar," said Bill O'Neill, co-founder of commodity consulting firm LOGIC Advisors in Sonoma, California.
The role of bullion as a safe-haven investment should not be underestimated, market experts say. During the recent sell-offs in global stocks, gold was unable to attract any flight-to-safety bids as risk-averse investors dumped bullion together with other "risky" securities.
O'Neill said that the dollar's dramatic decline was a positive for bullion. But he contended that other bullish factors had not yet been fully reflected in gold's current rally.
"The importance of the alternative-asset and flight-to-safety demand was very much shown by the fact that we had oil pushing well over $70 and the dollar plunging, and yet gold wasn't catching up," O'Neill said.
Spot gold <XAU=> traded at $683 an ounce on Tuesday, up more than $40, or nearly 7 percent, from its July low, as the dollar fell to a 15-year trough against major currencies and a record low versus the euro as investors fret about repercussions from the U.S. subprime mortgage market.
Bullion hit a high of $693.60 in April this year, after it set a 26-year peak of $730 in May of 2006.
Caesar Bryan, portfolio manager of the $450 million GAMCO Gold Fund in New York, said that some fund managers were already switching their investments to gold, which is used as a hedge against a falling dollar and inflation, and away from paper assets like stocks and bonds.
Bryan said that gold could appreciate not only against the dollar but also major currencies due to the rapid growth of money supply globally.
"I would expect gold to begin to outperform fiat currency across the board at some point," Bryan said. "Gold is the ultimate money."
Indeed, the inverse correlation between gold and the dollar index (.DXY: Quote, Profile, Research) has strengthened to a negative 0.91 in the past month from a negative 0.62 in the last 20 years, Reuters data showed.
Frank Holmes, chief executive of U.S. Global Investors in San Antonio, Texas, with about $5 billion in assets under management, said that gold's long-term inverse correlation with the dollar, and its positive correlation with oil, were temporarily disrupted, and that provided a buying opportunity for gold.
Holmes said that gold was poised to jump on a pickup in jewelry buying in Asia, and also helped by seasonal pattern, as demand tended to rally in September as jewelers worldwide began to stock for gold's high shopping seasons during Christmas, Ramadan and Chinese New Year.
A weakened dollar could also hurt gold miners, Holmes suggested. LOGIC Advisors' O'Neill said mining companies should hedge their currency risks carefully because big moves in the foreign exchange markets were not uncommon.
With a weaker dollar, mining companies are paying higher exchange rates to fund operations outside of the United States, even as their gold output is denominated in the dollars.
George Gero, vice president at RBC Capital Markets Global Futures in New York, said a declining dollar generally prompted investors to diversify investments into gold. Also, there had been no major redemptions in bullion exchange-traded funds (ETF) even when gold was sold off heavily, he noted.
"One thing that doesn't help gold is the resolve of the Federal Reserve to fight inflation," Gero said. This is because high U.S. interest rates could hurt gold -- an asset with no yield, and investors could switch to high-yield U.S. Treasury bonds as safe-haven investments.
Caesar Bryan, portfolio manager of the $450 million GAMCO Gold Fund in New York, said that some fund managers were already switching their investments to gold, which is used as a hedge against a falling dollar and inflation, and away from paper assets like stocks and bonds.
Bryan said that gold could appreciate not only against the dollar but also major currencies due to the rapid growth of money supply globally.
"I would expect gold to begin to outperform fiat currency across the board at some point," Bryan said. "Gold is the ultimate money."
Indeed, the inverse correlation between gold and the dollar index (.DXY: Quote, Profile, Research) has strengthened to a negative 0.91 in the past month from a negative 0.62 in the last 20 years, Reuters data showed.
Frank Holmes, chief executive of U.S. Global Investors in San Antonio, Texas, with about $5 billion in assets under management, said that gold's long-term inverse correlation with the dollar, and its positive correlation with oil, were temporarily disrupted, and that provided a buying opportunity for gold.
Holmes said that gold was poised to jump on a pickup in jewelry buying in Asia, and also helped by seasonal pattern, as demand tended to rally in September as jewelers worldwide began to stock for gold's high shopping seasons during Christmas, Ramadan and Chinese New Year.
A weakened dollar could also hurt gold miners, Holmes suggested. LOGIC Advisors' O'Neill said mining companies should hedge their currency risks carefully because big moves in the foreign exchange markets were not uncommon.
With a weaker dollar, mining companies are paying higher exchange rates to fund operations outside of the United States, even as their gold output is denominated in the dollars.
George Gero, vice president at RBC Capital Markets Global Futures in New York, said a declining dollar generally prompted investors to diversify investments into gold. Also, there had been no major redemptions in bullion exchange-traded funds (ETF) even when gold was sold off heavily, he noted.
"One thing that doesn't help gold is the resolve of the Federal Reserve to fight inflation," Gero said. This is because high U.S. interest rates could hurt gold -- an asset with no yield, and investors could switch to high-yield U.S. Treasury bonds as safe-haven investments.
Caesar Bryan, portfolio manager of the $450 million GAMCO Gold Fund in New York, said that some fund managers were already switching their investments to gold, which is used as a hedge against a falling dollar and inflation, and away from paper assets like stocks and bonds.
Bryan said that gold could appreciate not only against the dollar but also major currencies due to the rapid growth of money supply globally.
"I would expect gold to begin to outperform fiat currency across the board at some point," Bryan said. "Gold is the ultimate money."
Indeed, the inverse correlation between gold and the dollar index (.DXY: Quote, Profile, Research) has strengthened to a negative 0.91 in the past month from a negative 0.62 in the last 20 years, Reuters data showed.
Frank Holmes, chief executive of U.S. Global Investors in San Antonio, Texas, with about $5 billion in assets under management, said that gold's long-term inverse correlation with the dollar, and its positive correlation with oil, were temporarily disrupted, and that provided a buying opportunity for gold.
Holmes said that gold was poised to jump on a pickup in jewelry buying in Asia, and also helped by seasonal pattern, as demand tended to rally in September as jewelers worldwide began to stock for gold's high shopping seasons during Christmas, Ramadan and Chinese New Year.
A weakened dollar could also hurt gold miners, Holmes suggested. LOGIC Advisors' O'Neill said mining companies should hedge their currency risks carefully because big moves in the foreign exchange markets were not uncommon.
With a weaker dollar, mining companies are paying higher exchange rates to fund operations outside of the United States, even as their gold output is denominated in the dollars.
George Gero, vice president at RBC Capital Markets Global Futures in New York, said a declining dollar generally prompted investors to diversify investments into gold. Also, there had been no major redemptions in bullion exchange-traded funds (ETF) even when gold was sold off heavily, he noted.
"One thing that doesn't help gold is the resolve of the Federal Reserve to fight inflation," Gero said. This is because high U.S. interest rates could hurt gold -- an asset with no yield, and investors could switch to high-yield U.S. Treasury bonds as safe-haven investments. |
