Why record high Aussie gold prices can stick around
Updated: Nov 20, 2019
Gold prices have jumped 26% or US$312 per ounce in the past 12 months to trade at the highest level in nearly six years. A combination of lower US interest rates and global economic trade tensions has been the positive catalyst for the safe-haven metal.
However, the performance looks even more impressive in non-US dollar terms – particularly in Aussie dollars, with the Australian dollar gold price rallying 35% in the same period to a record high level of A$2,220/oz.
The extra prop has been a surprising stronger US dollar, which would normally be falling in a lower US interest rate yielding market. The anomaly has resulted in a positive 0.56 rolling 12-month correlation between gold prices and the US dollar (the 20-year average has been negative 0.53).
A higher US gold price and US dollar is a win-win for Australian gold prices (and producers). The two markets normally move in opposite directions creating a natural hedge or offsetting impact in the Aussie gold price.
The question emerges - what creates this windfall and can it prevail? The answer lies in the relative yield appeal of major economic markets. Despite US interest rates falling (normally driving the US dollar lower), the main counter currency market -the Euro - is also lowering interest too much less attractive negative yields.
To boot, the economic prospects in the trade-sensitive European economies is much less attractive than the fiscally propped up US economy. The rising uncertainty over a messy Brexit scenario is also forcing many investors to lighten their currency weightings in the region.
As a result, support for the US dollar looks increasingly assured in the short to medium term. While the prospect of further easing by the US Federal Reserve (the current US 10-year bond yield is 1.75% along with negative yields in Europe (and Japan) can only increase the appeal for the zero-yielding, but safe-haven harbor, of gold prices
US$ & A$ Gold Price