The bullion market seems to have settled, for now, following the announcement of the FOMC launching QE3. Other than the effects of the recent stimulus by the Federal Reserve on the bullion market, the ongoing appreciation of the euro is also among the contributing factors to the recent recovery of gold and bullion producers' stocks. Let's examine what's next for the euro and how will it affect gold and gold producers.
During recent weeks, shares of Barrick Gold (ABX) continued to outperform the price of gold by a high margin: During August and September, the stock has increased by 29.1%. In comparison, during the same time, the price of gold has risen by "only" 9.6%. SPDR Gold Shares (GLD) has increased by 9.7%. In the chart below are the normalized indexes of Barrick's stock, gold, and the S&P 500 (prices are normalized to July 31, 2012). As you can see, Barrick's stock has hiked in recent weeks by a much larger margin than either gold or the S&P 500 index have. Part of the rise in Barrick's stock was due to the recent increase in the price of gold: During August and September, the linear correlation between gold and Barrick's stock was 0.75, which means (under certain assumptions) that nearly 56% of the volatility of the stock could be explained by the movement of the price of gold. Another related factor that may have affected the rally of Barrick's stock was the recent recovery of the euro/USD.
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During September, the euro/USD has increased by nearly 3.1%, most likely due to the announcement of QE3, the German High Court's approval of the EMS, and the expectations that Spain is likely to request the ECB purchase its bonds.
There is a strong relation between not only euro/USD and gold, but also between euro/USD and gold producers. The chart below presents the development of the linear correlation between Barrick and the euro/USD during the year (moving correlations of 20 business days). As indicated below, in recent months the linear correlation between the two was strong, which suggest that the rise of the euro/USD might have also been a factor that rallied Barrick's stock.
So what's next for euro/USD?
The expectations of the market that the ECB will launch its bond purchase program have helped rally the euro in recent weeks, but if Spain won't request that the ECB start its program, this could pull down the euro. The recent Spanish bond auction was successful, so it may further impede the Spanish government from pulling the trigger on the ECB bond program.
The recent U.S. reports have presented mixed signals as to the progress of the U.S. economy. Housing starts rose by 2.3% during August, the Philly Fed rose again but was still negative, and jobless claims are still high. This mixed bag may have curbed the rally of the euro/USD; if it continues this way, it could further curb the rise of the euro/USD.
Greece might be closer to a deal vis-à-vis its repayment schedule, according to the Greek press. But until there is evidence to support this claim, the uncertainly around the Greek debt crisis might resurface again, which could pull down the euro. Recent EU-related reports, such as the German manufacturing PMI, weren't positive. If such reports continue to show little improvement in the EU economy, that could also bring the recent rally of the euro/USD to a halt.
The recent developments in the euro area and in the U.S. suggest that the recent rise in the euro/USD might change direction or just curb its upward trend. In such a case, all things being equal, this could pull back the price of gold and bullion producers' stocks.
For further reading, see "What Affects The Price Of Gold?"