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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© Bellwether Investment Management Inc. 2022. This communication is intended for residents of the provinces in which we are registered and is not meant to be a solicitation to any persons not resident in those provinces. Any opinions expressed in this article are just that, and are not guarantees of any future performance or returns. Some of the information contained in this article has been drawn from sources believed to be reliable but due to the fact that it is provided by a third party, it cannot be guaranteed to be accurate or complete. Bellwether Investment © Management Inc. and Bellwether Family Wealth cannot provide tax advice and therefore we recommend that you consult your tax advisor for further assistance with your tax planning and the preparation of your tax return. The report is prepared for general informational purposes only and the securities mentioned in this report should not be construed as a recommendation for any specific securities.

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