Why is gold resisting the strength in the US$?

The price of gold in US dollars has fallen, but those declines have been surprisingly small given the strength of the rally in the greenback on a trade weighted basis. With the Fed poised to hike in a week or so and few expecting the US dollar bull run to end any time soon, its a surprise that the gold price has held above $1000/oz.

One way of quantifying this is using a model/framework for understanding gold price movements relative to other markets that is explained in detail in this post.

As the chart left shows, the relationship between gold, the US broad TWI and 10-year TIPs has been fairly consistent since 2009, with modeled outcomes pretty close to actual gold prices. There has been periods of divergence, but ultimately the trend and the levels of forecasts and actual data have not been too far apart.

That seems to have changed though, particularly in the last 6 months. During this time, 10 year TIPs have sold off somewhat, although yields are still very low. USD TWI has rallied strongly.

Another way of looking at this is via gold in US$ vs. the US Trade Weighted index, with the fitted line between the two very flat compared to recent history.

It is likely this divergence has been driven by the composition of the US dollar rally in the last 6 months in particular.

This has largely been due to a large fall in Emerging market currencies,rather than the more closely followed larger markets in the Euro and the Yen. While currencies like the Brazilian Real, Russian Rouble and other South American oil/commodity exporters only account for 10pc of the US trade weighted indexed, the movements in these currencies has been spectacularly weak.

If we did the same analysis for gold removing these currencies, the results are likely to be much more consistent with what we have seen seen 2009. So perhaps there hasn't been a paradigm shift for gold, but there has been for many of these troubled emerging markets.