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What record high gold prices mean for markets

Gold hits new high

Gold prices have soared to record highs this month, with futures trading above $2,100/oz for the second time in history and even reaching $2,150 in intraday trading to mark the highest price in recorded history. This unprecedented price action in the gold market has significant implications for various financial markets, including stocks, forex, and interest rates.

Gold has always been considered a safe haven asset, a store of value during times of uncertainty or fear in other markets. Investors tend to flock to gold when they are concerned about the value of their investments or cash. However, the source of this surge is not as easily attributable. The changing interest rate landscape may have a part in it as traders expect rates to fall across the board in the coming year. The appeal of gold, a non-interest bearing asset, tends to rise with lowering rates.

Gold’s dynamic relationship to stocks and forex

The relationship between gold and other markets, such as stocks and forex, has evolved over the years. Historically, gold has been negatively correlated with the S&P 500, meaning that when stocks are down, gold tends to perform well. However, since the pandemic, this relationship has become more positive, with gold and stocks moving in tandem. This change in correlation raises questions about the dynamic between these markets and whether there is reason for the trend or if other factors are pushing both assets upwards.

The relationship between gold and the US dollar is also worth noting. Historically, there has been an inverse relationship between gold and the dollar. As the dollar weakens, gold tends to rise. This correlation can be seen best against the Swiss franc. In the past three years, USD/CHF has a -0.52 correlation to gold. Other USD pairs such as EUR/USD and AUD/USD share correlations of similar strength.