One Simple Graph: Gold At Constant Euro-Dollar Price

by: Mateusz Polak


Gold is currency-dependent, correlated with EUR/USD at over 0.3.

Removing currency changes from gold prices results in a clearer picture of gold supply and demand.

It is possible to trade gold detrended from EUR/USD via hedging.

Following on my last week's analysis of copper at constant EUR/USD, today's patient is gold (relevant tickers: GOLDX, FGLDX, SGGDX, TGLDX). Again, as any commodity, it is heavily dependent on the main currency pairs, although for a different reason than, for example, copper or oil. Gold is considered by many (quite falsely) to be a safe and stable alternative to keeping money in any currency, as in times of turmoil gold is still worth a lot, while paper is paper, regardless of the zeroes printed on it. And there also comes the factor that gold, priced in dollars, may be worth much more or much less to those wishing to buy it with a currency other than the greenback. A quick look at the last 10 years data shows that gold is correlated with EURUSD at Pearson r = .307, which is quite a result for noisy market data - the covariance coefficient r2 = .094, meaning that movements in EUR/USD alone explain 9.4% of the changes in gold prices.

To remove the currency-related noise from the gold price graph, I again apply the simple method of dividing gold OHLC prices by EUR/USD OHLC, hence acquiring results as if the euro and dollar were at constant parity. The resulting graphs (since 2005-01-01 and zoomed in since 2012-01-01) are presented below. For reference, I also included the non-corrected graph for gold futures for the same timeframe (graph 3). If you wish to trade an instrument based on the properties seen in these graphs (and fundamentals of gold), simply use gold hedged against EURUSD (with the percentage correction based off of the current EUR/USD prices when applying the hedge).

Gold at EUR/USD Parity

Gold at EUR/USD Parity (since 2012)

Gold futures prices

It can be seen that the resulting graph is actually more volatile during the last two years than non-corrected gold, which is a result of the problems in the Eurozone: gold is known to increase prices at times of uncertainty, but the Eurozone uncertainty also caused a dramatic fall in EUR/USD, hence correcting the gold price downward due to a relatively stronger dollar. Of particular interest is the sharp price increase coinciding with the late 2014 Euro drop, which is not noticeable in non-corrected gold prices. At EUR/USD parity, we are actually quite close to the record highs following the 2005-2012 bull market - the highs recorded in January '15 are just 15% below the records from late 2012. Currently (in 2015) we are in a narrow corridor between 1070 - 1159 (x EUR/USD) and exiting this corridor would warrant broader price changes. Considering the unraveling Greek bankruptcy 'risk', the more probable option is exiting upwards. Again, I leave any judgment up to you, depending on the strategies you apply, however the corrected gold graph does seem to offer a lot of trading opportunities. For macroeconomic reasons (Greece & Fed), I would consider buying gold and hedging it against EUR/USD, with a take profit at 1150 x EUR/USD (+5%) at the very least.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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