Whilst exchange rates are notoriously hard to predict, the decision of the ECB to buy euro 60B per month from March 2015 to end-September 2016 (and more if necessary) is widely seen as bearish for EUR/USD. Coupled with a likely tightening of monetary policy by the US Federal Reserve this year, EUR/USD at parity is seen as a distinct possibility.
We thought we would ask – what does our fair value model suggest this would mean for the gold price? To begin with, we find a strong negative correlation between the gold price and EUR/USD. The simple direct correlation coefficient between the two from the last 6.5 years of price data is -0.19. (-1.00 would indicate perfect negative correlation). This means that the gold price has tended to rise when EUR/USD has fallen.
This is interesting because the gold price has been negatively correlated to the US dollar. There is clearly a little more to it than simple direct correlation – correlation must be assessed in the context of many other drivers. Also EUR/USD movements will impact the other drivers which will in turn feed back on the gold price.
Our model tries to allow for all this by applying multiple regression analysis to 22 variables over 6.5 years of daily price data to arrive at a fair value. The direct impact on the fair value of each variable of a change in (in this case) EUR/USD is assessed. The impact on the fair value of the gold price of all these changes is then determined.
We find that EUR/USD at parity would have an upward direct impact on the fair value gold price. This could be stronger still after the indirect effects are taken into account. The graph below shows that the impact would be positive for commodities generally, with the exception of silver.
