By Raul de Frutos
Gold's rally over the past six weeks is the most powerful rally we've seen since the yellow metal peaked in 2011.
Just after hitting a 5-year low in December, gold bounced in January, achieving a new 1-year high on Thursday.
Gold prices hit a one-year high. Source: @StockCharts.com
Such a sharp move was not something expected. Especially while, overall, commodities markets are in bearish mode, and in the face of a strong dollar. However, gold may be able to finally buck the falling trend in commodities.
The Stock Markets Plunge
Dow Jones (in black) plunges since January while gold surges. Source: MetalMiner analysis of @StockCharts.com data.
The chart above shows the inverse correlation between gold prices and US equities since the beginning of the year.
The Dollar Weakens
US Dollar (in green) decline in February boost gold prices. Source: MetalMiner analysis of @StockCharts.com.
The safe haven theory doesn't always work, but this time it's working really well, as the dollar has weakened significantly. The dollar and gold prices move in opposite directions. In February, the dollar index fell to the lowest levels in almost four months. Part of it was that some investors now fear a softer-than-expected US economy, potentially making the Federal Reserve put interest rate increases on hold. The chart above shows the inverse relationship between gold and the dollar in February.
The Yen Rises and Bond Yields Plunge
Japanese yen rallies in February drives US dollar down. Source: @StockCharts.com.
Another reason why the dollar fell in February is a stronger Japanese currency. Last month, Japan's central bank surprised markets by setting the country's first negative interest rates. That, in theory, should have driven the yen lower... but it didn't. Investors instead pushed the yen to its strongest levels in more than a year, gaining almost 8% against the greenback since the January.
10-Year US Treasury yields fall sharply in 2016. Source: @StockCharts.com.
Lower rates in Europe and negative rates in Japan are helping drive sovereign bond yields lower everywhere else. Last week, the 10-Year Treasure Yield fell below 1.6% for the first time in three years. The lower the yield, the lower the returns investors get from their bonds. That's important because in periods where yields are near zero, many investors prefer to buy gold rather than bonds that practically pay zero. In this manner, in the current stock market turmoil, part of the money that would normally go to bonds is going to gold.
What This Means For Gold Buyers
Gold is really bucking the bear commodity trend. Commodities are falling with stocks, as the stock market turmoil is being driven by slower growth and lack of demand.
That is particularly bearish for base metals, but it doesn't affect gold much, since it is the only commodity wherein physical annual demand is only a tiny fraction of total supply available, and shortages of gold caused by physical demand never happen. Although gold prices may need some time to digest the recent gains, if the rout in stock markets continues and the dollar keeps weakening, it's possible for gold to finally decouple from other commodities.