This year we have witnessed a breakout in the price of gold, with the spot price finally cracking through an elusive ceiling of $1300/oz. At the end of June, the spot price hit $1409/oz, representing a 10% gain. It is important to note that this move is in US dollar terms. In the face of a weakening US dollar, the price of gold converted back to Canadian dollars has risen by only about 6% this year.

 

There are many theories bandied about as to what drives gold prices higher. Inflation, interest rates, equity market risk, are a few drivers. We suspect that the primary driver is the value of the US dollar. When the US dollar strengthens, the price of gold tends to fall, and vice-versa. Taking a look at the correlation between the spot price of gold and the US Dollar Index (DXY / The US dollar relative to a basket of major currencies), it has historically been modestly negative. However, it recently touched a multi-year low and is trending toward a very strong negative level.

 

Source: data retrieved from Bloomberg database July 2019
Source: data retrieved from Bloomberg database July 2019

 

The end result is that Canadian investors looking to add gold exposure to their portfolios should strongly consider looking at gold ETFs that hedge US dollar exposure.

 


 

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