Gold Priced in Euros Separates Dollar Weakness From Genuine Demand

With U.S. federal debt above 100% of gross domestic product and the U.S. Treasury moving to expand its buyback operations at the long end of the curve, the gold market has been handed a test of what is actually driving it. Gold priced in euros rose alongside gold priced in U.S. dollars, which means the move cannot be attributed to dollar weakness alone and points instead to a broader bid tied to fiscal uncertainty. That distinction carries weight because a dollar-driven move in gold tends to unwind when the dollar recovers, whereas an uncertainty-driven move does not. For investors holding gold outside the United States, the currency of measurement is the difference between an exchange rate story and a fiscal one.

Rhona O'Connell is Head of Market Analysis for EMEA and Asia at StoneX, and has analyzed commodities markets for more than 40 years. Her coverage spans precious metals demand across Europe and Asia, the markets in which gold priced in currencies other than the U.S. dollar separates an exchange rate move from a broader repricing.

Key Themes

• Gold rises in euro terms as well as U.S. dollar terms, ruling out dollar weakness as the sole driver.
• U.S. debt above 100% of gross domestic product leaves the Treasury little fiscal headroom as maturities roll over.
• Long-dated Treasury yields fell only modestly after the buyback announcement, and the longer upward trend remains intact.

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Gold Gains in Euro Terms Point Beyond a Softer Dollar

Gold's advance in euro terms is the clearest evidence that the move extended well past a weaker U.S. dollar. When the U.S. Treasury announced its expanded buyback operations, the dollar came off quickly and reasonably substantially, which would ordinarily be sufficient on its own to lift the dollar-denominated gold price. What complicates that reading is that the gain was not confined to dollar pricing, since gold appreciated in most other major currencies as well, a pattern consistent with buyers responding to uncertainty running through the financial system rather than to a single exchange rate. For a European or Asian investor, the currency of measurement therefore separates a gold position acting as a hedge against the dollar from one responding to a broader fiscal strain. "It rose not just because the dollar was off. It rose in most other major currencies as well, notably in euro terms", notes O'Connell.

Rising Yields Reinforce Gold Rather Than Compete With It

"What we have now is a tug of war for gold between increased uncertainty on the one side and rising yields on the other", O'Connell said, before qualifying the framing. Rising U.S. Treasury yields and a rising gold price are, in this instance, responses to the same fiscal pressure rather than opposing forces. A senior fund manager at Fidelity, raising his gold holdings, made the point that gold is not simply reacting to rising yields but to the reason they are rising. In this case the pressure behind the long end is the cost of financing an expanding debt load as existing maturities roll over. Consequently, the two variables that would normally offset one another are pulling in the same direction, a setup O'Connell describes as one that "points to tailwinds rather than a tug of war". The practical impact is that a further rise in long-dated yields, if it stems from fiscal strain rather than from growth, removes a headwind for gold instead of adding one.

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--- Written by Gus Farrow, Senior Manager, StoneX Media

--- Expert: Rhona O'Connell, Head of Market Analysis for EMEA and Asia, StoneX Financial Ltd.