The long term price of gold could come under pressure from a rallying dollar as the risk from the sovereign debt crisis subsides, Barclays Capital analysts said on Tuesday.
In a research note BarCap said it had found fairly wide agreement among investors that gold was, at least to some extent, a risk trade.
The correlation between the US dollar and the euro to gold tended towards the negative side, suggesting the gold price was being supported by investors diversifying their portfolios to include gold as a risk trade, the analysts wrote.
But, it added, such a view was difficult to square with the “daily growth rate in gold” which had been positively correlated to - and therefore rising in line with - daily rises in the Australian dollar versus the Japanese yen and the Swedish krona versus the yen.
While both were pro-cyclical currency pairs, said the research note, and the correlations were not very strong, they were “fairly persistent.”
“However, we could be looking at the wrong risk in these relationships. Investors who are worried about weak, though not disastrous, growth can find hedges fairly straightforwardly, but they might find it much more difficult to hedge really serious economic dysfunction,” the analysts added.
“One important set of investors are the sovereign wealth managers, traditional buyers of gold, and another possibility is that gold price moves as a function of their diversification away from US dollar and euro denominated assets,“ they explained.
Another possible conclusion was that the US dollar still retained an advantage over the euro as a store of value despite the US fiscal concerns.
If the European sovereign debt crisis were to stabilise, as BarCap analysts expected it to, the relationship between the gold price and the two major currencies would change as well, they said, with the euro becoming more positively correlated with gold and the US dollar more negatively correlated.
This would bode well for gold in the short term but in the longer term would mean the US dollar would rally, putting gold under pressure at the same time.