Gold-dollar relationship remains tricky - WGC

Gold continues to play an important role in investor portfolios, as does the US dollar, which is at a 12-year high, according to the latest research from the World Gold Council (WGC).

A report from the Gold Investor Council says that due to the short-term strength of the US dollar, a negative impact on the price of gold is expected. However, gold plays a very complex role in the global market, the report clarifies. If the dollar does not reach a higher level, it could lead to a significant correction in the stock markets, leaving investors vulnerable.

Changes in global markets and the structure of the gold market should reduce the dollar's impact on gold in the long term. Stock markets are getting overvalued as they head into the bubble and bond yields remain near their lows. “We recommend that investors use gold to balance the risks in their portfolios,” the report said.

It clarifies that outside the US, investors should treat gold as an insurance policy. Although gold has fallen in value against the US dollar, it has made significant gains against other global currencies, resulting in strong international sales of coins and bullion. The WGC explains that gold rallies more on a weaker US dollar than falls on a stronger US dollar.

Earlier this month, gold fell to a four-month low, however, price data shows it is still one of the top performing commodities, especially when compared to most non-ferrous metals, silver and oil.

This diversification is most evident in Asia, as demand in China and India remains strong by historical standards. "The upward trend in the east has become visible in the global gold market, and the likes of China, Hong Kong and Singapore have begun to play a more active role," the report said. This is likely to lead to an increase in transactions in gold rather than in US dollars.