Pragmatic Capitalism

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As global debt problems mushroom and cause traders to adjust their outlooks, an overlooked outcome is emerging: The months-long link between risky currencies and gold is breaking down. At the same time, traders are directing money into safe havens, making their connection to gold stronger.

The correlation between currencies and gold can be fickle, but the shifting dynamics in the last few weeks have been stark-the relationship between the euro and gold and the Australian dollar and gold have broken down. In fact, the euro is now almost negatively correlated with the metal, meaning the two are moving in opposite directions. That’s a major shift from their behavior through the spring.

As those correlations between perceived risky currencies and gold broke down, a new one emerged between the safe-haven yen and gold.

These new relationships are growing because European and U.S. debt problems–as well as general concerns about global economic growth–have “started to lead to a whiff of more risk aversion,” said Jonathon Griggs, managing director and head of the currency group at J.P. Morgan Asset Management in London. “This could morph into a more general risk-averse environment.”

That means the safe-haven yen gets a bid, while riskier currencies like the euro, or those linked to commodities like the Australian dollar, will falter. At the same time, gold gets a boost from its perceived safe-haven status so it begins moving in lock-step with the yen.

European leaders are meeting Thursday to discuss a potential new rescue package for debt-burdened Greece, while U.S. lawmakers are staring down an Aug. 2 deadline to get a deal completed to raise the country’s debt ceiling. With uncertainty swirling, traders are increasingly flocking to assets they think are less risky, analysts say.

The 30-day correlation between euro-dollar and gold was -0.503 on a scale where “1” means a direct relationship, “0” means no relationship and “-1” means an inverse relationship. It was near 0 on July 11 and was consistently above 0.5 between early March and late June.

The Australian dollar’s correlation to gold prices has fallen to 0.257 after spending more than a month this spring above 0.8. The inverse correlation between dollar-yen and gold has surged to -0.862 from -0.309 as recently as July 6.

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