Gold and the Loonie

Precious metals are on a tear. Gold prices are up 43% year to date, while silver has done even better, up 51%. Given Canada’s role as a major exporter of precious metals, it begs the question: should the Canadian dollar be showing more strength?

Canada ranks as the world’s fourth-largest gold producer. Gold and silver exports accounted for 3.5% of its total exports last year, but at current price levels, that share is projected to double in 2025. Gold mining companies account for about 12% of the Toronto Stock Exchange’s market capitalization, making Canada second only to South Africa in terms of gold sector representation on a major stock index. Given this exposure, it would be reasonable to expect trade and investment flows to become increasingly supportive of the Canadian dollar.

Our analysis indicates that gold is becoming a bigger driver of the Canadian dollar, though it remains secondary to monetary policy. According to our factor decomposition model, gold prices currently explain about 12% of the weekly variance in USDCAD—far more than oil prices, but a distant runner-up to monetary policy, which explains roughly 25%.

Put another way, the loonie isn’t ignoring gold prices, but their impact is being offset by interest rate expectations.

Rate differentials may continue to favour the US dollar for now. As we highlighted External link., with both the Federal Reserve and the Bank of Canada cutting interest rates, the FX market will pay more attention to surprises relative to market expectations. While there are risks on both sides, we believe they are skewed towards the Fed doing a little less and the BoC doing a little more than the market anticipates. This should keep the loonie on the back foot for now.

Commodity prices may be a larger tailwind for the loonie next year. A more broad-based rise in Canada’s terms of trade, including higher energy prices, may help revive the loonie’s “commodity currency” status. That outcome would also depend on whether higher prices and shifts in government policy stimulate domestic production—either through new capital investment or the activation of idle capacity. So far, gold production has remained stagnant despite higher prices.