Description
Describes the inter market linkages between gold, USD, Euro and interest rates.
Course: MCX Commodities and Derivatives
1
Facts about Gold as a commodity Facts about the USD Facts about the Euro An overview of interest rates and Monetary Policy Linkage between USD and Gold prices
3 7 11 13 18
Linkage between Interest rates and Gold prices Linkage between Interest rates and currency
An illustration of cross border linkage Evidences from the market Conclusion
19 20
21 24 27
2
Facts about Gold as a Commodity
3
?
Gold Specie Standard
? Actual currency in circulation consisted of gold coins with
?
Gold Bullion Standard
? Currency in circulation consisted of paper notes
a fixed gold content
?
Gold Exchange Standard
convertible into gold on demand at a fixed conversion ratio
? Exchange rate between any pair of currencies was
determined by their respective exchange rates against gold ? Money Supply in a country was tied to the amount of gold reserves the country had
4
?
?
?
? ? ? ?
Post World War – II, the US Govt. undertook to convert the USD freely into Gold at a fixed parity of $35 per ounce Other member countries of the IMF agreed to fix the parities of their currencies vis-à-vis the $ with variation of 1% on either side of the central parity being permissible If the exchange rate hit either of the limits, the monetary authorities of the country could intervene in the market USD became international money In 1971, the system was abandoned – all major currencies went on a float In 1976, gold was demonetized – Gold is no longer used to settle international payments USD - Vehicle currency followed by Euro
5
Fundamental Value of Gold Trading Value of Gold
Factor Gold Supply USD Inflation Monetary Policy Interest Rates
~ $888 ~ $1400
% impact 50% 25% 10% 10% 5%
Gold is most actively traded on the COMEX Average daily volatility of Gold is ~ 1.23%
6
Facts about the USD
7
Official currency of the United States of America World's foremost reserve currency – 64% of the reserves in the world are held in USD Vehicle currency for trades across the world – accounts for 60% of international trade Standard unit of currency in international markets for commodities like gold and crude oil. U.S. Dollar Index (USDX): Established for tracking the value of the USD against a basket of six currencies (EUR, JPY, GBP, CAD, CHF and SEK) The major currency pairs in the world are: EUR/USD, JPY/USD, GBP/USD, CHF/USD, USD/CAD and AUD/USD. USD/INR is an Exotic currency pair
8
?
?
US Dollar Index is today’s premier metric for tracking the dollar It is a weighted geometric mean of the dollar’s value compared with:
? ? ? ? ? ?
Euro Pound Sterling Canadian Dollar Swedish Krona Swiss Franc Japanese Yen
57.6% weight 11.9% weight 9.1% weight 4.2% weight 3.6% weight 13.6% weight
9
External Factors • Monetary Policy of other major economies of the world (Europe, Japan) • Performance of the other major economies of the world
Internal Factors • Monetary Policy of the US Fed • Health of the US economy • Dow Jones Index • Unemployment rate • Inflation
10
Facts about the Euro
11
Euro came into existence on January 1, 1999 Official currency of the Eurozone – 17 of the 27 Member states of the EU Second largest reserve currency (26.5% of the reserves of the world are in Euro) after the USD Second most traded currency in the world after the USD Comprises 57.6% of the USD Index 27% of total volume traded in the currency market is EUR/USD
12
An overview of Interest Rates and Monetary Policy
13
Interest Rates are tools used by the Central Bank of a country to control the money supply in the economy. ? Interest rates of all major economies of the world are of importance while analyzing markets
?
? US Fed
? European Central Bank
? Bank of England ? Bank of Japan
14
Economic growth
Monetary Policy: Increase in interest rates
Reduces money supply in economy
Increase in purchasing power/ real income
Increased liquidity or money supply
Curbs Inflation
Higher demand for goods
Inflation
15
Economic down turn
Monetary PolicyCut interest rates
Increase money supply in economy
Unemployment
Reduced ProductionFurther unemployment
Fuels demand
Reduced Purchasing power
Reduce demand for goods
Industrial growthLower unemployment
16
Inter Market Linkages
17
Gold is internationally denominated in USD When the USD* weakens, in order to purchase the same amount of Gold, more dollars have to be paid ? The Price of Gold in USD* increases as a result ? Between 1999 and 2008, the correlation between Gold and the USD* has been at -0.84 ? However the correlation is not always negative, since Gold is also used as a hedge against inflation
? ?
* - We are referring to the dollar index
18
?
?
?
Low interest rates – high inflationary expectations – Investors put in their money in Gold as a hedge against inflation – Gold prices increase Loose monetary policy - Economic situation is not good - Investors buy gold as a safe haven asset – Gold prices increase. Low interest rates - Reduce demand of USD, USD falls - Gold price in USD increases.
19
Short term Impact on Exchange Rates:
Increase in interest rates* Flow of funds into the country Demand for local currency increases Local currency appreciates
Long term Impact on Exchange Rates:
Borrowing becomes more expensive Economic growth is curbed
Increase in interest rates
Local currency depreciates
* - With respect to interest rates in another country
20
?
Short term effects:
? An interest rate hike in the US ? Investors will start pulling out their money from markets offering lower interest rates (say India) and start investing in the US markets. ? What does this mean for India? ? Reduced demand for the rupee ? Rupee weakens against the USD ? What does this mean for Gold prices? ? USD strengthens, hence Gold price in USD falls * ? Since rupee is weakening, Gold price in rupee terms should rise ? The impact depends upon the correlation between USD/INR and Gold prices
* - If the Gold price does not rise due to weak correlation between USD/INR and Gold price, Gold price will increase in rupee terms due to weaker rupee
21
?
Long term effects:
? An interest rate hike in the US:
? Signal of slowdown in growth in the US economy (due to increase in borrowing rate) ? Investors will start pulling out their money from the US and start investing in markets where economic growth is expected (say India)
? What does this mean for India?
? Increased demand for the rupee ? Rupee will strengthen against the USD
? What does this mean for Gold prices?
? USD weakens, hence Gold price in USD terms will rise ? Since rupee is strengthening, Gold price in rupee terms should fall ? The impact depends upon the correlation between USD/INR and Gold prices
22
Illustration of Price parity - Increase in Gold Price (USD) Gold Price in USD 1400 1401 USD/INR Conversion Factor Parity Price 45 0.32 20160 45 0.32 20174.4
Illustration of Price parity - (Depreciation of rupee) Gold Price in USD 1400 1400 USD/INR Conversion Factor Parity Price 45 0.32 20160 45.05 0.32 20182.4
23
•Contradictory evidence •Positive correlation between Gold and the USD
24
Gold 15 Min, 3 Day 60 Min, 1 Week 60 Min, 2 Weeks Daily, 1 Month
USD/CAD AUD/USD -0.84 -0.87 -0.92 -0.86 0.78 0.84 0.86 0.79
NZD/USD EUR/USD GBP/USD USD/JPY USD/CHF 0.74 0.69 0.75 0.78 0.89 0.78 0.66 0.19 0.88 0.84 0.72 0.77 -0.4 -0.85 -0.8 -0.79 -0.7 -0.89 -0.86 -0.69
As of November 2010
•The USD fell with respect to all other major currencies, except the Euro •Gold prices hit a record high •Correlation between Gold and Euro/USD weakened significantly, while that between Gold and other pairs strengthened •However in the week after, the Gold prices fell on the USD rising against all major currencies including the Euro – Correlation between Euro/USD and Gold increased
25
•Sovereign debt crisis in Europe Flow of money into gold in search of a safe haven, but also into USD to escape the European issues. •Investors sold European bonds driving their yields higher, and bought US bonds driving their yields lower. •Both Gold and the USD rose, negating their usually negative correlation. •Inverse relationship between gold and US treasury rates.
26
?
?
The interest rates, EUR/USD Exchange rate and Gold Prices are correlated However, there is no fixed correlation between them – both in terms of value and sign
27
Thank You
28
doc_996941614.pptx
Describes the inter market linkages between gold, USD, Euro and interest rates.
Course: MCX Commodities and Derivatives
1
Facts about Gold as a commodity Facts about the USD Facts about the Euro An overview of interest rates and Monetary Policy Linkage between USD and Gold prices
3 7 11 13 18
Linkage between Interest rates and Gold prices Linkage between Interest rates and currency
An illustration of cross border linkage Evidences from the market Conclusion
19 20
21 24 27
2
Facts about Gold as a Commodity
3
?
Gold Specie Standard
? Actual currency in circulation consisted of gold coins with
?
Gold Bullion Standard
? Currency in circulation consisted of paper notes
a fixed gold content
?
Gold Exchange Standard
convertible into gold on demand at a fixed conversion ratio
? Exchange rate between any pair of currencies was
determined by their respective exchange rates against gold ? Money Supply in a country was tied to the amount of gold reserves the country had
4
?
?
?
? ? ? ?
Post World War – II, the US Govt. undertook to convert the USD freely into Gold at a fixed parity of $35 per ounce Other member countries of the IMF agreed to fix the parities of their currencies vis-à-vis the $ with variation of 1% on either side of the central parity being permissible If the exchange rate hit either of the limits, the monetary authorities of the country could intervene in the market USD became international money In 1971, the system was abandoned – all major currencies went on a float In 1976, gold was demonetized – Gold is no longer used to settle international payments USD - Vehicle currency followed by Euro
5
Fundamental Value of Gold Trading Value of Gold
Factor Gold Supply USD Inflation Monetary Policy Interest Rates
~ $888 ~ $1400
% impact 50% 25% 10% 10% 5%
Gold is most actively traded on the COMEX Average daily volatility of Gold is ~ 1.23%
6
Facts about the USD
7
Official currency of the United States of America World's foremost reserve currency – 64% of the reserves in the world are held in USD Vehicle currency for trades across the world – accounts for 60% of international trade Standard unit of currency in international markets for commodities like gold and crude oil. U.S. Dollar Index (USDX): Established for tracking the value of the USD against a basket of six currencies (EUR, JPY, GBP, CAD, CHF and SEK) The major currency pairs in the world are: EUR/USD, JPY/USD, GBP/USD, CHF/USD, USD/CAD and AUD/USD. USD/INR is an Exotic currency pair
8
?
?
US Dollar Index is today’s premier metric for tracking the dollar It is a weighted geometric mean of the dollar’s value compared with:
? ? ? ? ? ?
Euro Pound Sterling Canadian Dollar Swedish Krona Swiss Franc Japanese Yen
57.6% weight 11.9% weight 9.1% weight 4.2% weight 3.6% weight 13.6% weight
9
External Factors • Monetary Policy of other major economies of the world (Europe, Japan) • Performance of the other major economies of the world
Internal Factors • Monetary Policy of the US Fed • Health of the US economy • Dow Jones Index • Unemployment rate • Inflation
10
Facts about the Euro
11
Euro came into existence on January 1, 1999 Official currency of the Eurozone – 17 of the 27 Member states of the EU Second largest reserve currency (26.5% of the reserves of the world are in Euro) after the USD Second most traded currency in the world after the USD Comprises 57.6% of the USD Index 27% of total volume traded in the currency market is EUR/USD
12
An overview of Interest Rates and Monetary Policy
13
Interest Rates are tools used by the Central Bank of a country to control the money supply in the economy. ? Interest rates of all major economies of the world are of importance while analyzing markets
?
? US Fed
? European Central Bank
? Bank of England ? Bank of Japan
14
Economic growth
Monetary Policy: Increase in interest rates
Reduces money supply in economy
Increase in purchasing power/ real income
Increased liquidity or money supply
Curbs Inflation
Higher demand for goods
Inflation
15
Economic down turn
Monetary PolicyCut interest rates
Increase money supply in economy
Unemployment
Reduced ProductionFurther unemployment
Fuels demand
Reduced Purchasing power
Reduce demand for goods
Industrial growthLower unemployment
16
Inter Market Linkages
17
Gold is internationally denominated in USD When the USD* weakens, in order to purchase the same amount of Gold, more dollars have to be paid ? The Price of Gold in USD* increases as a result ? Between 1999 and 2008, the correlation between Gold and the USD* has been at -0.84 ? However the correlation is not always negative, since Gold is also used as a hedge against inflation
? ?
* - We are referring to the dollar index
18
?
?
?
Low interest rates – high inflationary expectations – Investors put in their money in Gold as a hedge against inflation – Gold prices increase Loose monetary policy - Economic situation is not good - Investors buy gold as a safe haven asset – Gold prices increase. Low interest rates - Reduce demand of USD, USD falls - Gold price in USD increases.
19
Short term Impact on Exchange Rates:
Increase in interest rates* Flow of funds into the country Demand for local currency increases Local currency appreciates
Long term Impact on Exchange Rates:
Borrowing becomes more expensive Economic growth is curbed
Increase in interest rates
Local currency depreciates
* - With respect to interest rates in another country
20
?
Short term effects:
? An interest rate hike in the US ? Investors will start pulling out their money from markets offering lower interest rates (say India) and start investing in the US markets. ? What does this mean for India? ? Reduced demand for the rupee ? Rupee weakens against the USD ? What does this mean for Gold prices? ? USD strengthens, hence Gold price in USD falls * ? Since rupee is weakening, Gold price in rupee terms should rise ? The impact depends upon the correlation between USD/INR and Gold prices
* - If the Gold price does not rise due to weak correlation between USD/INR and Gold price, Gold price will increase in rupee terms due to weaker rupee
21
?
Long term effects:
? An interest rate hike in the US:
? Signal of slowdown in growth in the US economy (due to increase in borrowing rate) ? Investors will start pulling out their money from the US and start investing in markets where economic growth is expected (say India)
? What does this mean for India?
? Increased demand for the rupee ? Rupee will strengthen against the USD
? What does this mean for Gold prices?
? USD weakens, hence Gold price in USD terms will rise ? Since rupee is strengthening, Gold price in rupee terms should fall ? The impact depends upon the correlation between USD/INR and Gold prices
22
Illustration of Price parity - Increase in Gold Price (USD) Gold Price in USD 1400 1401 USD/INR Conversion Factor Parity Price 45 0.32 20160 45 0.32 20174.4
Illustration of Price parity - (Depreciation of rupee) Gold Price in USD 1400 1400 USD/INR Conversion Factor Parity Price 45 0.32 20160 45.05 0.32 20182.4
23
•Contradictory evidence •Positive correlation between Gold and the USD
24
Gold 15 Min, 3 Day 60 Min, 1 Week 60 Min, 2 Weeks Daily, 1 Month
USD/CAD AUD/USD -0.84 -0.87 -0.92 -0.86 0.78 0.84 0.86 0.79
NZD/USD EUR/USD GBP/USD USD/JPY USD/CHF 0.74 0.69 0.75 0.78 0.89 0.78 0.66 0.19 0.88 0.84 0.72 0.77 -0.4 -0.85 -0.8 -0.79 -0.7 -0.89 -0.86 -0.69
As of November 2010
•The USD fell with respect to all other major currencies, except the Euro •Gold prices hit a record high •Correlation between Gold and Euro/USD weakened significantly, while that between Gold and other pairs strengthened •However in the week after, the Gold prices fell on the USD rising against all major currencies including the Euro – Correlation between Euro/USD and Gold increased
25
•Sovereign debt crisis in Europe Flow of money into gold in search of a safe haven, but also into USD to escape the European issues. •Investors sold European bonds driving their yields higher, and bought US bonds driving their yields lower. •Both Gold and the USD rose, negating their usually negative correlation. •Inverse relationship between gold and US treasury rates.
26
?
?
The interest rates, EUR/USD Exchange rate and Gold Prices are correlated However, there is no fixed correlation between them – both in terms of value and sign
27
Thank You
28
doc_996941614.pptx