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The Limited Impact that Dollar Strength has on Gold Speaks Volumes

The Limited Impact that Dollar Strength has on Gold Speaks Volumes

The Limited Impact of Dollar Strength on Gold Tells a very Different Story

  • The dollar hit a six-week high against the euro today
  • This has more to do with euro weakness than dollar strength
  • Euro weakness is in large part fuelled by fears of a Le Pen presidency in France
  • While opinion polls give her little chance of winning, polls were deceptive in 2016
  • Uncertainty has sent investors to safe havens, such as silver and gold
  • Silver is the best performer, closing the XAUXAG ratio from 72.4 to 68.6
  • We expect the market to target $1,278/oz for gold
  • We see a bigger upside to gold in the short term


Ongoing uncertainty on multiple fronts is triggering a rise in demand for safe-haven investments such as gold and silver – Ole Hansen

The dollar has hit a six-week high against the euro. The wider forex market, however, tells us that this latest move is mostly euro weakness over French election concerns rather than dollar strength. As a result we are seeing both gold and silver showing resilience with XAUEUR reaching the highest level since November 10.


Gold and euro dollar

Source: Bloomberg; Saxo Bank

The increased risks and worries related to a potential surprise outcome of the French presidential elections can be seen in the way investors currently behave in the forex and bond market. Opinion polls are giving Marine Le Pen close to no chance of becoming the next president. The market, however, has become very skeptical of polls following recent experiences with the UK’s referendum and the election of Donald Trump in the US.

With polls narrowing in favour of Le Pen, the euro has come under pressure and Bloomberg reports that the cost of puts relative to calls are now the most expensive in two years. In the bond market the yield spread between 10-year French and German government bonds has risen to 0.81 percent, the widest since 2012.

Into this uncertainty we are continuing to see a pick-up in demand for alternative investments such as gold and silver. In January, it was increased uncertainty about the impact of the new administration in Washington that gave precious metals a boost. Since then, worries about Europe have added another layer of support and this has so far resulted in year-to-date gains for gold of 8% and 12.5% for silver.


Gold investments through futures and ETP

Source: Bloomberg; Saxo Bank

Investment demand from hedge funds in the futures market and investors using exchange-traded products have so far been relatively muted with the Federal Open Market Committee in tightening mode and universal expectations of a stronger dollar providing a headwind. The resilience seen especially in the last week, where the dollar strengthened, should provide some additional support but first a key technical level at $1,245/oz needs to be taken out.

Gold has settled into a range determined by the 38.2% and 50% retracement of the July to December sell-off. We maintain a bullish bias, with the market likely to target $1,278/oz on a break. Support remains firm at $1,220/oz, which also co-insides with trendline support from the December low.


Spot gold with retracement levels

Source: SaxoTraderGO

Silver has been the best performer on a relative basis with the XAUXAG ratio at 68.6, down from 72.4 at the beginning of the year. Hedge funds have been continuous buyers of silver for the past seven weeks and in the week ending February 14 it led to funds holding a bigger position in silver (70,746 lots) than gold (67,982 lots). On that basis we see a potential bigger upside to gold in the short term from a positioning perspective.


Speculative positioning in Gold & Silver

Source: Bloomberg; Saxo Bank


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