Editor's Note: This article was originally published in John Murphy's Market Message on Friday, July 12th at 11:39am ET.
Gold is more than just a commodity. Gold is sometimes also viewed as an alternate currency. When global traders lose confidence in their currency, they often turn to gold as an alternative store of value. Since gold is quoted in dollars, it rises in value when the dollar weakens. That's one way for investors to preserve their wealth when the Fed starts to lower rates and weaken its currency. Gold recently rose to a six-year high on falling U.S. interest rates which have weakened the dollar (aided by a more dovish Fed). So gold is rising in dollar terms. The true hallmark of a bull market in gold, however, is its ability to rise relative to other major currencies. And it's doing just that.
Chart 1 compares this year's performance in the Gold (red bar to the left) relative to the world's major currencies. That includes (in order of relative strength) the Canadian Dollar, Japanese yen, U.S. Dollar, Swiss franc, Aussie Dollar, British pound, and the Euro. And it shows Gold doing better than all of them. Chart 2 is even more graphic by showing those same currencies relative to the price of gold which is plotted as the zero line. Clearly, all of them are losing value relative to gold.
With global growth slowing, central bankers around the world have taken a more dovish turn toward monetary stimulus which usually weakens their local currencies. The Fed is the most recent central bank (and the biggest) to telegraph lower interest rates and a weaker dollar. That may be one of the main reasons that global traders have turned to gold as a new store of value. Since gold is a non-interest bearing asset, it also does better when global rates are dropping.