Gold and the US Dollar

Apr 23, 2008: 10:52 PM CST

Continuing our brief study of intermarket relationships, let’s look at two markets with a powerful negative correlation: The US Dollar Index and the Gold Market.

Gold traditionally is a hedge against inflation, and inflation often is correlated with a weak dollar and higher commodity prices across the board (which is the environment we see now).

As the dollar declines, commodity prices (including gold) often rally, linking the inverse relationship. Let’s zoom down from a monthly chart down to the daily chart:

Notice the shift that occurred at the ‘turn of the century’ where gold prices were at their lowest levels of the last decade and the US Dollar Index (along with the Stock Market) was making new highs. The market shifted in 2001 (as the recession began) and the price of gold (per ounce) has never looked back.

The US Dollar, on the other hand, is another story. The Dollar index peaked at 120 and is now 41% lower than it was at its peak. Gold, on the other hand, rose from $250 (per ounce) to a peak above $1,000 an ounce, rising 400% in the same 8 year period.

This also means that the value of a US dollar is worth much less in terms of gold prices than it was in 2,000. In 2000, if you were offered $1,000 in gold that you stored away, if you cashed in today, you would get back $4,000 (if converted into dollars). Of course, those dollars are worth less today than they were then, so it may be better to keep the investment in gold! But that is for another lesson.

Let’s keep our focus on these two markets for the meantime.

Weekly charts show the same strong inverse relationship:

Again, the picture is the same. Since early 2007, gold prices have almost doubled while the US Dollar Index fell 20 points (weakening against other currencies).

If the US Dollar Index reverses trend, then expect gold’s trend to pause or reverse as well. Until that happens, the current trend remains in force.

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One Response to “Gold and the US Dollar”

  1. Stock Market » Blog Archive » Gold and the US Dollar Says:

    […] Afraid to Trade.com Blog wrote an interesting post today on Gold and the US DollarHere’s a quick excerpt Continuing our brief study of intermarket relationships, let’s look at two markets with a powerful negative correlation: The US Dollar Index and the Gold Market. Gold traditionally is a hedge against inflation, and inflation often is correlated with a weak dollar and higher commodity prices across the board (which is the environment we see now). As the dollar declines, commodity prices (including gold) often rally, linking the inverse relationship. Let’s zoom down from a monthly chart down […]