Gold’s Relationship to the Dollar, Chinese Renminbi Is Changing

At a Glance

  • The dollar and renminbi have had virtually the same relationship to gold for the past two decades
  • A positive resolution to the trade dispute might be bullish for the renminbi and gold.

Gold prices have been on a wild ride. Between 2000 and 2011, they rose from $280 to around $1,900 per ounce before falling back to $1,050 in 2015. Currently, they are trading close to $1,300 an ounce. Gold has made similar-sized moves when priced in the Chinese renminbi (CNH). From a CNH perspective, prices rose from 2,000 to 12,000 between 2001 and 2011 before falling back to 7,000 in 2015. Currently, it’s trading near 9,000 CNH (Figure 1). The similarity in performance reflects the stability of CNH versus the U.S. dollar, staying within about a 25 percent range during the past two decades.

Is Gold a Hedge for Chinese Growth?

China’s economic growth sent the prices of most commodities soaring from 2001 until 2011. Many commodities, including wheat, copper, aluminum, platinum, soybean oil and crude oil have had strong positive correlations with both the “Li Keqiang” index (a narrow but useful measure of Chinese growth that focuses on electricity consumption, bank loans and rail freight volumes) and official Chinese GDP. Gold is one of the few commodities to exhibit a negative correlation with both measures of Chinese output growth since 2005. Generally, stronger Chinese growth has been bad for gold and vice versa.

Gold Versus the Dollar and Renminbi

Since 2017, Gold has become increasingly negatively correlated with the dollar but has become positively correlated with trade-weighted CNH.

In short, the weakening of CNH, particularly in Q2 and Q3 2018, during the early stages of the U.S.-Chinese trade war, appears to have reduced gold demand. Since Q4 2018, CNH’s strength may have contributed to the bid in gold prices. As such, any positive resolution to the trade dispute might be bullish for CNH and gold. More broadly, however, divergences between the USD and CNH could have a big impact on gold prices, and very differing ones from a renminbi or dollar perspective.

Monetary Policy

An easing of U.S. fiscal policy and the subsequent boost to growth emboldened the Federal Reserve to tighten policy more than it might have otherwise. Eight rate hikes since the 2016 election created significant headwinds for gold.

The de-pricing of further Fed rate hikes is great news for gold, a store of value which pays no interest. Furthermore, Fed fund futures have recently begun to price a significant easing of Fed policy in the next year or two (Figure 7). If the Fed follows through with actual rate cuts, this could be quite bullish for gold.

Meanwhile, the Peoples Bank of China is taking very different approach. Unlike the Fed, it hasn’t tightened policy in years. Instead, it is actively easing monetary policy but not through rate cuts. Rather, it is reducing its reserve requirement ratio to encourage more credit creation while keeping interest rates unchanged at low levels.

The divergence in CNY and USD’s correlation with gold probably has a great deal to do with the recent divergence in Chinese and U.S. monetary policy. China’s monetary easing appears to be a response to the negative impact of the trade war.

Erik Norland is a Senior Economist at CME Group.

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