Thursday, April 7, 2011

Fallout Of Gold's Bull Market: Higher Gold-Linked Currencies

As reported by Sue Chang over at MarketWatch, gold's bull market has helped push up currencies of nations with large presences in gold production. My own native country of Canada is one of them.
The unlikely trio of the Australian dollar, the Canadian loonie and the South African rand have closely tracked gold in recent weeks, and with the precious metal expected to test new heights, the so-called proxy currencies may go along for the ride....

“There is a strong correlation between gold and these currencies,” said Camilla Sutton, chief currency strategist at Scotia Capital.

The Canadian dollar has moved most in step with gold recently. With the value 1 being the benchmark indicating that a currency mimics every move made by gold, the correlation between gold and the Canadian loonie is 0.63. Between gold and the South African rand, it is 0.5 while it is 0.6 between gold and the Australian dollar pair, according to Sutton.
Of course, for the Canadian dollar, oil has a lot to do with its rise too. The strong correlation between gold and the loonie exists in part because of the strong correlation between gold and crude oil.

It's quite a sea change for Canada. Back in the days when Canadian opinion leaders were embarrassed about Canada's extractive industries, it was held that a lower dollar was good for Canadian manufacturing exports and thus Canada. I still remember arguments made back in the 1980s that claimed a "fair" value for the Canadian dollar was 75 cents American. Yes, 75 cents or C$1.33 per greenback.

Needless to say, those days are long gone. Resource extraction is still an important part of the Canadian economy, and there has not been any Canadian equivalent of America's Rust Belt as a result of the loonie going as high as it has.

That said, the higher loonie does mean a revenue shrinkage for gold producers with mines in Canada. Gold's bull market in Canadian funds has been more modest: the '01 low for gold was around C$400. It's now C$1400. The same limitation applies to the Australian dollar and South African rand.

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