October Proves to Be Rare Good Month for Both Gold and Dollar

Normally, investors wanting to guess which way gold is headed look to the dollar.

When the greenback goes up, the precious metal almost always goes down. Few assets have a stronger inverse correlation to the Bloomberg Dollar Spot Index, with gold favored as a hedge against the world’s reserve currency.

But that’s not what happened in October, a month when both assets gained ground for the first time in 20 months.

The change has been driven by last month’s rout in emerging market equities, and particularly in China, which has seen investors seek out haven assets. At the same time, the strength of the U.S. economy is benefiting the dollar.

The inverse relationship between gold and the dollar could continue to break down, said Michael McCarthy, chief market strategist for Asia Pacific at CMC Markets in Sydney. Concerns about rising inflation and the outcome of the midterm Congressional elections could drive gold higher.

“We’re likely to see both a rising U.S. dollar and a rising gold price at least into next Tuesday night,” McCarthy said by phone. The midterms are “a potential game-changer. Predicting beyond that at the moment is very difficult.”

The Bloomberg Dollar Spot Index rose 2.3 percent in October to the highest in 17 months, while gold gained 2 percent, the most since January. The metal advanced 0.8 percent to $1,224.64 an ounce at 10:04 a.m. in London.

Risk Aversion

Gold’s gains owe “mostly to the recent de-risking in equity markets that we view as a correction rather than being in the throes of a bear market,” Harry Tchilinguirian, head of commodity-markets strategy at BNP Paribas SA, said by email. While the bank raised its forecasts for gold, it still sees it declining, from an average $1,260 an ounce in 2018 to $1,145 in 2019.

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