**What Governs Gold's Price Now?
Correlation Blindness
Ultimately, If Gold correlates to both the USD and US Rates which in turn correlate to US economic power; What does Gold’s price ignoring those correlations say about US economic power?
They Want the (Gold) Correlations
Intro:
Bank analysts and financial media have been wondering aloud why Gold has not been following its “traditional” US financial correlations. Some are warning (again) there will be hell to pay when these correlations return. That may be true in the short term. But here is what is more important:
Economic power is moving east. Along with that eastern migration comes pricing power over commodities. As we show below, Traditional correlations (a proxy for economic drivers) are fine if you use the right country1.
Gold is priced in dollars globally. But gold is being bought in Yuan which is increasingly *not* economically tied to Dollars. Put another (Mercantilist) way; As global trade fragments, so does global price.
We show below that gold is increasingly a proxy for China’s economy. We also suspect the banks covering the asset will soon start talking about it this way. The correlations are fine, if you know where to look.
Contents:
Gold and Dollar Correlations
Dollar Correlations Are Not Broken
China Correlations Matter
Correlations are Governors
What Governs How Much They Want The Gold?
Goldman’s Trading Desk Today
Correlations and Unipolarity/Multipolarity
More Charts
1- Gold and Dollar Correlations
Gold is still correlated to the USD
Gold is still priced as an opportunity cost to real US Bond yields.
These correlations still exist. They are simple mathematical facts. There is no denying this.
Specifically:
Gold is Still Priced in Dollars
Gold is still priced in USD, therefore the higher the buying power of the USD (the less dollars are available) , the lower the price of Gold. That’s just a supply/demand fact.
Yet gold remains buoyant in the face of a strong USD. Why?
Owning Gold Has Real Rate Opportunity Cost
Similarly, the higher real rates are, the bigger the opportunity cost to own Gold. That is also a fact related to PV and FV of money.
How much interest are you willing to give up now for the possibility to make money on Gold in the future?
If these correlations still exist, what is going on?
US financial correlations are resetting to make room for other forces.
2- Dollar Correlations Are Not Broken
From Our Post: Gold, The Everything Hedge Revisited
Gold hasn’t decoupled from yields and the dollar, but the beta has decreased. While a gap has opened up, this does not mean the relationship has broken down.
The negative correlation of both pairs has become more negative than the historical average
So; why is Gold higher if these relationships are not broken? The simple answer is, China wants the gold. But it’s more than that. They are driving correlations now as well.
By now we all know why “they want the gold”. Summarized for new readers here: Need for a trustworthy Store of Value for trade with no counterparty risk to replace US Bonds. That is why they want the gold.
Back to the correlation problem: