Sunday, December 5, 2010

FX swings

As a result of my interest in bullion prices, I have carefully tracked movements in the Euro/USD rate for the last 3 years, as it is widely held to bear a correlation to gold prices. The weaker the dollar, it is generally believed, the stronger is gold.

While this has often been the case, such easy correlations are far from water-tight:
1. In November and December of 2009, the Euro strengthened marginally, but gold shot up by almost 15%.

2. From April to July of this year, 2010, gold and dollar behaved as though the textbooks had to be re-written, and gold moved in opposition to the Euro -
2.1 as the Euro weakened sharply, from 1.35 to 1.20, gold went up, from 1150 to 1250.
2.2 as the Euro reversed, back up to 1.32, gold dropped  by almost 100 dollars an ounce.

Aside from the gold-dollar link, the other major development of this year has been the increase in FX volatility. From November 2009 to June of 2010, the dollar had a clear downward trend, from 1.50 to 1.20. And though the line was not smooth, corrections in the curve never exceeded 4%.  Since then, though, the Euro-USD graph has not been able to make up its mind - Greek  debt crisis, and the dollar zooms; QE 2, and the dollar swoons. Irish bailout, and the Euro slumps again.

Between June 2010 and early December, there have been four shifts in the Euro-dollar trend line:
June to August   1.20 to 1.325
August to Sep   1.325 to 1.26
Sep to Nov        1.26 to 1.42
Nov                   1.42 to 1.30
And the latest move, in the first few days of December - 1.30 to 1.36

This volatility is pretty wild - it seems as if the markets cannot make up their mind which loser to bet against.

There seems to be only one clear winner: gold, which takes me back to where I began. Since August 2010, gold has risen 250 dollas an ounce. Gains in silver have been even more impressive.

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