LONDON (Reuters) - Dollar weakness could prove a boon to gold, pushing prices to new highs for the year above $1,000, as the influence from stock markets and attitudes toward risk wane in favor of its traditional driver.
Last week’s dollar tumble saw investors look anew at its fundamentals at a time when gold-specific factors were lacking, leaving the metal to move unfettered through key resistance at $935.50 and hit 8-week highs above $960.
On Wednesday gold was trading around $950 an ounce.
While the currency tried to regain poise, markets have for now cast aside dollar-positive risk aversion to focus on what makes it most vulnerable -- a trillion-dollar-plus U.S. deficit and the impact of unorthodox monetary policy to boost lending.
If the spotlight on weak dollar fundamentals intensifies, gold could find itself in the eye of a perfect storm.
“The dollar/gold relationship will look prominent under two conditions: one is if the dollar is moving around a lot, and the second is if the gold price isn’t moving around a lot,” said Virtual Metals analyst Matthew Turner.
Bullion’s link to the dollar is a well-established one, with the metal traditionally used as a hedge against weakness in the U.S. currency. A softer dollar also makes dollar-priced gold cheaper for holders of other currencies.
That relationship broke down early this year as both assets benefited from a flight to safety among investors. According to Reuters data, gold in fact showed a positive correlation with the dollar of 0.5 in January, as stock market sentiment proved the overriding factor to both.
In May, however, it was back to -0.8, close to a perfect negative correlation of -1.
The fact that dollar weakness, rather than risk aversion or other factors, was behind gold’s rise last week was also shown by the its relative stability when priced in other currencies.
When gold last broke $1,000 in February, it hit record highs priced in euros, sterling, Australian and Canadian dollars. With gold just $40 below that level last week, prices were up only slightly in those currencies.
The outlook for gold therefore looks largely contingent on the path of the dollar over the coming months. With the technical picture now more positive for bullion after last week’s gains, fresh dollar weakness could push prices back toward their February highs, analysts say.
“People are fearful again that we could be facing a dollar collapse, which would have severe ramifications across the board,” said Calyon metals analyst Robin Bhar.
“All the factors that people have been warning about for several months now seem to be coming to the fore.”
However some analysts, including Virtual Metals’ Turner, believe the dollar could pause in its run lower, especially with policymakers now hinting at further interest rate cuts in Europe, which would knock the euro and limit bullion’s short-term gains.
But in the longer term, analysts have identified more dollar-negative than supportive factors. The dollar hit a 2009 low on Friday, and with markets now focused on a massive U.S. deficit, it could be set for further losses.
Inflation sparked by quantitative easing -- under which governments inject fresh money into the financial system -- plus sky-high government borrowing to meet the cost of bailouts and fiscal stimulus packages could send the euro to $1.45, analysts said.
“There are concerns that all the quantitative easing will weaken the dollar, and we have a lot of that ahead of us,” said William Adams, an analyst with TheBullionDesk.com.
Ashraf Laidi, chief markets strategist at CMC Markets, said he sees the euro re-testing its highs of around $1.55/1.57 by the end of the year. This could send gold to $1,200-1,300 an ounce by the end of the third quarter, he said.
Gold is a widely used hedge against rising prices, as it is considered to hold its value while paper currencies fluctuate.
Moreover, the precious metal is likely to benefit from fears of a more widespread currency crisis, analysts say.
“Gold is going up when the dollar is weak, but none of the major currencies are standing out as looking particularly attractive at the moment,” said UBS strategist John Reade. “It is simply that the dollar is falling faster than the euro.”
“I am seeing gold as being bought, recently at least, because people are concerned about the risks of longer-term inflation, and concerned about the debasement of major currencies.”
Reporting by Jan Harvey and Veronica Brown; Editing by Peter Blackburn
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