This week, investors bid up gold and silver in anticipation of weaker than expected employment numbers, as measured by the Non-farm Payrolls (NFP) report from the Bureau of Labor Statistics (BLS).
The biggest economic data point printed every month, non-farm payrolls affect economists’ view on the health of the overall economy based upon the ability of consumers to continue spending. Consumers make up roughly 72% of the US economy, and it’s not unfair to say employment is a major focus of the White House, The Federal Reserve, the financial media, and recognized economists every month.
For instance, it is often normal to see the dollar strengthen on positive payroll reports and weaken on negative ones. Being the world’s reserve currency, the dollar’s strength impacts the relative purchasing power of all other currencies. A strong dollar generally means higher inflation in the rest of the world, everything else being equal. In fact, it is the strength of the dollar lately that is being blamed on recent economic problems in China, the Eurozone, and the UK.
As shown in the chart above, courtesy of DailyFX, the dollar index (DXY) experiences heightened volatility during the release of the NFP data by the government. Traders often consider how the relative strength, or weakness, of the jobs numbers will affect the short term direction of the economy. Traders may decide to sell when numbers are not favorable and buy when the numbers are much higher than expected by economists.
When the NFP numbers surprise strongly to the upside, the DXY index will strengthen, and vice versa when the report is substantially less positive than expected. As in the chart below, we can see a rough correlation between the strength of the deviation of the payroll numbers from economists’ expectations, and the resultant strength and direction of the dollar as measured by the DXY.
The same effect can often be seen in the precious metals gold and silver, albeit in a contrarian manner to what occurs in the dollar. Short-term economic expectations, based upon the strength of the monthly payroll numbers, often influence how derivative traders on the US exchange trade precious metals. Gold and silver both gapped down on the news that payrolls were stronger than expected, see the chart below.
Gold Prices in Other Currencies
Even though gold tends to move, at least on a short-term basis, in opposite direction to the USD during NFP reporting time every month, it often does quite the opposite when measured in other currencies. Here is a graph of the gold price reported in the Chinese Yuan. As you can see, gold strengthened, when measured in Yuan, after the more positive than expected NFP report was released Friday morning.
Same with gold as measured in the Euro, as shown below.
So while the metals may trade in the opposite direction (inverse correlation) to the DXY during the week of the NFP release every month, it often moves in the same direction when measured in other currencies. This is quite easy to explain: The DXY is an index of a basket of currencies in which the dollar is measured relative to the others. So what does it all mean?
It is often easy to be misled by the relationship of the DXY index and its component currencies when measured against gold. Long term, the DXY and gold are not as closely correlated as they may first appear.
Gold is the Ultimate Barometer of Currencies Over Time
Charting the US dollar index to gold shows that there are periods where the DXY and gold are not inversely correlated, and often move inversely, and with different strengths, during periods of high market uncertainty.
As shown above, during periods of market stress such as post-Great Recession and the pandemic, the inverse correlation of gold and the dollar holds. However, in between highly impactful economic events, that relationship breaks down. Further, gold has continued in its upward direction since 2000, despite the relative strength of the dollar.
It is pretty obvious, when viewed with a long-term lens, that gold is not as highly inversely correlated to the dollar’s relative strength as market pundits would have you believe. The longer-term chart above shows a much different picture, one of gold’s superior strengths over times in which the dollar is supposedly king of the fiat currencies.
While the dollar has weakened somewhat against other currencies since the turn of the century, gold’s value has increased significantly. In fact, the last two decades have been one of gold’s strongest periods ever. Much of that is due to the end of price fixing in gold up until 1971 when Nixon removed gold convertibility of the dollar and devalued the dollar against gold.
Final Thoughts
Market traders, despite the opinion of the safety of the dollar and US treasuries, have voted very strongly in favor of gold for quite some time. That is why examining the relationships of gold to the dollar is more important when viewed over time. The daily ‘noise’ of commentators on financial media when reporting on gold often lacks this type of focus. That is largely due in part to the media seeing gold as simply a commodity, and not the money of last resort for the economic system. Gold market traders around the world, however, appear to have a much different opinion when measured over the last two decades.
And I do too, based upon the strength of gold as used in the financial system. With the emphasis on price-hedged gold as a high-quality liquid asset (HQLA) in Basel III guidelines, it is widely expected that gold will take a rather large role in the central banking system going forward. That is most likely the reason that the world’s central banks have been net buyers of gold for the last 12 years, post the Great Recession. Central banks have been buying despite the opinion of most financial media pundits that gold is a barbarous relic and no longer an important barometer in the financial system.
Often accepted ‘facts’ within the financial industry are no more than group speak that has over time been institutionalized into the tribal knowledge of financial pundits and analysts who are not precious metals-focused. The reality is that especially during times of heightened economic uncertainty, the monetary decision-makers turn back to gold as a safe haven, much as world societies have done for over 5000 years.
So is gold really still the barbarous relic that your stock broker may have you believe? Or is there a deeper, more historic meaning for gold that may be re-emerging during the last few years? In that time we have seen a pandemic, global shutdowns, a boomerang in the markets as they cope with re-establishing base economic production, and a period of increased uncertainty in the financial markets as most asset classes have sold off this year. I will leave it to you to decide what gold means to you in your individual investment portfolio. But I know how much it means to mine, and why I am often seen as a long-term gold and silver advocate.
