Gold futures have plunged this year and with just a few weeks left in 2013, it is a foregone conclusion that the yellow metal will finish the year in the red, ending a 12-year bull market in the process.
Gold’s woes have not been confined to the yellow metal itself. Silver, gold’s cheaper, more plentiful cousin, has also tumbled this year. Along the way, havoc has been wrought on exchange traded funds such as the Market Vectors Gold Miners ETF (NYSEArca: GDX) and the Global X Silver Miners ETF (NYSE: SIL). [Gold’s Slide Ominous for Mining ETFs]
Some so-called commodity currencies have also struggled as gold prices have dipped, including the Australian dollar. The CurrencyShares Australian Dollar Trust (NYSEArca: FXA) is off 10.3% this year while the SPDR Gold Shares (NYSEArca: GLD) has lost 25.7%.
Gold is not the only reason the Aussie has weakened. The Reserve Bank of Australia has slashed interest rates by 225 basis since late 2011 to a record low of 2.5%. That likely has something to do with the Aussie’s weakness. Given RBA’s concerns regarding lack of contributions to the world’s 12th-largest economy from non-mining sectors, further rate cuts cannot be ruled out. At least that is the view of some market observers. [Interesting Views on the Aussie Dollar]
Currently trading at 0.9121, AUD/USD could fall further unless gold prices perk up in earnest. “A major technical patter favors further weakness,” reports David Rodriguez, quantitative strategist, at DailyFX.
Rodriguez also notes a “lack of significant technical support until $0.9013-9069” for AUD/USD. Portending further weakness in the Aussie is the fact that retail forex traders are heavily long the currency.
“Retail FX traders are now their most long the Australian Dollar versus its US namesake since it set a double bottom in September. Such one-sided sentiment warns that we’re at a potential sentiment extreme, but as long as crowds continue buying we’ll maintain our contrarian bias in favor of further weakness,” according to Rodriguez.
Gold weakness could actually work in favor of the Australian economy because its exporters have been crimped by the strong Aussie. In fact, the International Monetary Fund recently said the Aussie is overvalued by 10%. [IMF’s Comments Could Lift Inverse Aussie ETF]
Further retrenchment for gold could appease the IMF and Australian exporters that want the Aussie to decline, making the ProShares UltraShort Australian Dollar (NYSEArca: CROC), a potentially attractive trade in the process.
CurrencyShares Australian Dollar Trust
