Gold has been on an absolute heater lately. The dollar? Not so much. That’s the message from this week’s chart, shown above, which compares the cumulative return of gold to the U.S. dollar over the past year.
As you can see, gold is up more than 90% over the past 12 months. Over that same stretch, the U.S. dollar has fallen nearly 11%.
Directionally, this makes a lot of sense. A weaker dollar tends to help gold for a few simple, mechanical reasons. Gold is priced in dollars, so when the dollar falls, gold becomes cheaper for foreign buyers. That typically boosts demand and, in turn, prices.
A falling dollar also tends to signal easier financial conditions. Think lower real interest rates and higher inflation expectations. That environment is generally supportive for gold because gold doesn’t pay interest. When real yields fall, the opportunity cost of holding gold falls with them.
Oh, and on top of that, global investors and central banks often use gold as a hedge against things like currency debasement, inflation, and policy uncertainty. So when the dollar is weakening, those hedging flows usually pick up as well.
But, I mean, just looking at the chart, it does kind of seem like the move in gold is looking a bit… excessive? Meme-stock like?
For example, if we look at the 6-month return-to-volatility ratio of gold (shown below), we see that this month’s rip-roaring rally has carried it to extreme levels.
Historically, the data shows that moves of this magnitude in gold have typically been followed by lower 6-month forward returns.
Will that be the case again?
It’s hard to say. But for investors, the main takeaway is that, when the dollar is weakening, having a modest allocation to gold or precious metals can make sense as part of a diversified portfolio.
This is intended for informational purposes only and should not be used as the primary basis for an investment decision. Consult an advisor for your personal situation.
Indices mentioned are unmanaged, do not incur fees, and cannot be invested into directly.
Past performance does not guarantee future results.