LONDON – While gold is clearly a monetary asset and will, if anything, extend its influence as the only non-fiat currency (especially following developments in Europe last week), it is clear that in recent weeks it has been moving more closely in line with the rest of the commodities sector than with currencies or other financial instruments. Correlation analysis however shows that the relationship with the $:€ rate is tightening, while that with the G6-trade-weighted rate appears to be relatively static. The price in euros, meanwhile, has been tightening its relationship with credit default instruments as concerns over European debt have intensified once more.
Obviously risk appetite is an important driver of short term movements in the financial sector and this has been a key to the comparative homogeneity of the commodities sector, stretching back at least as far as the collapse of Lehman Brothers. The correlation table shown here does demonstrate, however, that “perception of risk” per se, as measured in this case by the VIX volatility index, is taking something of a back seat to currency movements, while gold and the equities are forging ever closer links – and there has been a sharp strengthening in the relationship with the ten-year bond. All of this tends to confirm the perception that investors remain nervous and this argues for further highs in due course. The path will not be a straight one, however, as there are still possibilities of the occasional bout of liquidation as a result of distress and in order to raise funds. Any dollar strength is likely also to see gold falter.