A Rare Tango

Since both the US greenback and gold are the rival asset classes or 'frenemies' in the safe haven space, it may be one of the reasons for a rare convergence in their price path.

- V.P.Nandakumar

Asset markets are in the cusp of a perfect storm. The yield of 10-year US treasury notes is within striking distance of the 4.5% mark after breaking higher in the last trading days of March – just 50 bps or so away from the Federal fund rates of 5%, stock market indices vaulting to all-time heights since the pandemic despite a pull back after the latest flare-up in the geopolitical tensions in the Middle East, benchmark Brent crude raking up a gain of 18.94% so far in 2024, the yellow metal price beating its own records every trading day with the dollar index (DXY), the go-to-gauge that tracks the movement of US dollar against a basket of currencies, in toe, investors never had their varied trading strategies put to test like this ever before. 

The pattern lays threadbare the reality of co-integrated markets – a close correlation among different asset classes – and the dangers of a contagion or a crash in one pocket of the market having its ripple effect on other asset markets as we saw during the Asian Financial Crisis of the late 1990s.

It may be appropriate for us to leave the task of deciphering the current asset market pattern to the high priests of economic theory to interpret. Rather, we may focus on the immediate puzzle that has been baffling everyone alike – the converging trend in the US dollar index and the prices of yellow metal, which in theory are inversely related. As far as the theory goes, since yellow metal prices are denominated in dollar, an uptick in the value of latter should have softened the prices of former on a pro-rata basis. Curiously, that is not the case as of now.