Gold’s vs the US Dollar: Correlation Is Not What Most Think

I commented on this a few days ago in Gold Surprisingly Correlated With the US Dollar.

Gold has been positively correlated to the US dollar for well over a year.

Most of the time gold is inversely correlated to the US dollar.

The problem, as the lead chart shows, is that the strength of moves in gold vs the strength in moves in the US dollar are totally random.

Look at the period between 1995 and 2005. A huge jump in the dollar index yielded a relatively small decline in the price of gold.

Between 2005 and 2012 gold went on a long one-way tear up regardless of what the dollar did. The net result was a huge blast higher in gold vs the move in the US dollar index.

Gold and Miners vs the S&P 500

A few days ago someone Tweeted I was wrong about the positive correlation between gold and the dollar, stating that the correlation was between gold and miners and the S&P 500.

That idea is more than silly as the following charts shows.

Gold vs the S&P 500

$XAU vs S&P 500

Warning: Don’t use short-term charts as a basis for making generalized statements.

Path of Least Resistance

That is another one of those blind statements that feeds the widespread belief that gold is largely about the dollar.

Let’s look at this still one more way.

Various Price Points of Gold

With the US dollar right where it is now, gold has been at $450, $380, $1080, and $1480.

Moreover, and as shown above, sometimes gold has a positive correlation to the US dollar and sometimes negative.

Gold’s Big Surge

Gold went on a huge surge from roughly $450 to $1924 with the US dollar index falling from roughly 90 to 72.70.

Gold then fell to $1045 with gold bears coming out of the woodwork. Moves in the dollar once again do not explain. Here is a chart that does explain.

Gold vs Faith in Central Banks

If you believe the Fed has everything under control, then the primary reason to own gold is insurance in case you are wrong.

But one look at repo action and QE that allegedly is not QE ought to be enough reason to convince anyone that the Fed does not have things under control.

Price Target?

I have no price target, but I do have this observation:

If the dollar falls to 72.70 and gold acts the same way, gold will be at well north of $2000.

That is an “if and” statement, not a prediction. Yet, I do think $2000 gold has a very good shot. Dollar fundamentals help.

Dollar Fundamentals

  1. The Fed is no longer tightening. The consensus opinion is the Fed is in for a long pause. I believe the Fed’s next move is another series of rate cuts. For discussion and an amusing set of “dot plots”, please see Fed Eyes Long Pause, No Rate Hikes in 2020
  2. European central banks are starting to see the folly of negative rate. If the ECB joins the rate hike party or at least stops QE, that will put upward pressure on the Euro and negative pressure on the dollar.
  3. Without a doubt the US stock market is extremely overvalued. This has led to dollar inflows from foreigners. When, not if, that reverses, the US dollar will reverse as well. For discussion, please see Where Will the Stock Market Be a Decade From Now?
  4. The US also suffers massively from a Ticking Time Bomb of Record High Corporate Debt. When that breaks, it will not be good for US equities.

Where are We?

Not only are gold fundamentals excellent, dollar fundamentals help.

Got Gold?

Mike “Mish” Shedlock

Subscribe to MishTalk Email Alerts.

Subscribers get an email alert of each post as they happen. Read the ones you like and you can unsubscribe at any time.

This post originated on MishTalk.Com

Thanks for Tuning In!

Mish

Subscribe
Notify of
guest

21 Comments
Newest
Oldest Most Voted
Inline Feedbacks
View all comments
TheWorldComplex
TheWorldComplex
4 years ago

There is a long-term positive correlation between the rising gold price and a rising US dollar since the beginning of 2008. This long-term correlation has been punctuated by several intervals of negative correlation, but the graph below shows that the heavy lifting done since 2008 looks like deflation

Source: link to worldcomplex.blogspot.com

(The site says the figure has been uploaded, but I can’t see it. It’s in the link)

5945
5945
4 years ago

Most people familiar with gold know there is often an inverse relationship with gold and the USDollar. But it varies from time to time. For the last 6-9 months the relationship has been an inverse relationship with gold and the interest rate on the 10 year treasury note. When the rate goes higher, gold drops in price. However, last week the USD and the interest rate went went up but gold also rose. As I said, it does vary from time to time.

WCVarones
WCVarones
4 years ago

It doesn’t make sense to look at gold/$ vs $. You have the dollar in both terms.

Look at gold/EUR vs. dollar index. It’s a positive correlation since the origin of the Euro.

Alternatively, look at gold/$ vs. EUR. Same thing.

JanNL
JanNL
4 years ago
Reply to  WCVarones

Indeed.

Scooot
Scooot
4 years ago
Reply to  WCVarones

I like to look at the Kitco gold index v the USD.

Scooot
Scooot
4 years ago
Reply to  WCVarones

Scooot
Scooot
4 years ago

I agree there is no long term correlation between Gold and the USD & particularly not in the coming months.
Here’s my simple analysis from an international perspective.
I think about 30% of all USD debt is held by Non USD based investors/holders. So what do they think?
The US stock market is trading at a premium, so high risk.
US bond markets are trading at very low yields, so also risky but perhaps slightly less so because of the slowing US economy.
The USD is high risk because of increasing money printing & debt. Other central banks are also printing money, but not to the same degree.
So regardless of whether the expensive USD stock market & Bond Markets continue to defy gravity, the USD risk is significant for Non USD based investors. Therefore in my opinion international investors will be looking to rebalance their assets away from the USD.
What will they buy? Their stock & bond markets are also expensive. I suspect Gold will be a prime target for many funds.
There’s been a lot of publicity about the Fed supposedly supporting equities via QE and other money printing. The Fed can’t support the USD by printing money as they can’t print foreign currencies with which to buy dollars. They’d have to use their foreign currency reserves in an attempt to support the dollar. It never works.
So in my mind, the key to what happens next, is whether international investors retain their confidence in the USD, and personally I don’t think they will. In the meantime, insurance is becoming more important so Gold should be well supported.

JonSellers
JonSellers
4 years ago
Reply to  Scooot

The Fed doesn’t print money. The US treasury essentially does by spending money. But those dollars are absorbed from the system by the issuance of an equivalent value of treasury bonds. The Fed can print non-interest bearing money and exchange it for interest bearing paper as it did during QE and today in the repo markets. The Fed has stopped QE and the repo market is very short term. And that is just designed to buy confidence in the banking community so interest rates don’t blow up.

Banks are the ones that actually print money when they make loans. And since those loans are almost always against assets, they rarely have an effect of the value of the dollar internationally. Now if you want to compare the value of the dollar against American real estate or stock prices, you’ll see a real decline in the value of the dollar.

Scooot
Scooot
4 years ago
Reply to  JonSellers

Yes, sorry, perhaps I shouldn’t have said the Fed, but the government or whoever. I appreciate QE was used to purchase US Treasuries, the proceeds of the sales went into the system though didn’t they? Or when they’re resold it will release new money into the system? It certainly drove yields artificially lower. With regards to repos being short term, for what I can tell they’re being rolled over in increasing amounts. The banking system seems to need the money.
However maybe my simple analysis is wrong, I’m not bound to it so open to opinions -:)

Maximus_Minimus
Maximus_Minimus
4 years ago
Reply to  Scooot

Basically right, but the demand was/is driven by hedge funds which are the under regulated part of the (banking) system. That’s where the money flows, and risk accumulates.

TheLege
TheLege
4 years ago
Reply to  JonSellers

Yes they do print money – maybe not the paper variety, but they do create (digital) money out of thin air. How on earth would they pay for $4 trillion worth of Treasuries if not with ‘printed money’?

The Treasury issues the debt to the Primary Dealers who then distribute the debt to their client network. All unsold Treasury paper sits on PD balance sheets until sold. During QE, the Fed bought paper from both ‘the market’ and from PDs – but an awful lot from PDs. The Fed doesn’t actually have any real money – it prints all it needs when it needs it and it destroys ‘money’ in the reverse process.

FromBrussels
FromBrussels
4 years ago
Reply to  Scooot

You want to buy a ‘healthy’ currency ? Have a look at the russian Ruble ! Despite all sanctions the russian economy is one of the best run economies : hardly any debt, neglectable social liabilities, positive trading balance, enormous reserves(gold, currencies), unlimited natural resources, a increasingly self sufficient economy thanks to the sanctions etc…. I have been buying ruble since sanctions were imposed , mostly, at the time, unpopular Russian Federation debt, at some point netting 15+% interest rates, on top of that the ruble gained 20+ % since last year. The real big profits are gone now, since more investors discovered value in the ruble, you now have to put up with 5 or 6 % interest rates at par, but there s still upside potential in the currency …..

Maximus_Minimus
Maximus_Minimus
4 years ago
Reply to  FromBrussels

I was thinking the same, but couldn’t think of a way to even open an account. Do you have some pointers?

FromBrussels
FromBrussels
4 years ago

it is a matter of opening a Rub account at your bank, then look for Rub shares, bonds …..What do you mean by ‘pointers’?

Maximus_Minimus
Maximus_Minimus
4 years ago
Reply to  FromBrussels

Pointers – just what you said. I can’t open Rub accounts at my banks, only fiat Canada/US dollar accounts.

FromBrussels
FromBrussels
4 years ago
Reply to  Scooot

Strange…..where do you live then ? ….If you don t mind me asking …

ZZR600
ZZR600
4 years ago

I agree with Mish’s analysis. In times of stress then you seek security in the least risky assets, these being currencies and gold. With the US$ being the best of a bad bunch, and the need for currency to transact in, it makes sense they can both move in parallel. Gold is great, but even on a personal and small scale level, you can’t buy your groceries with gold sovereigns (at least not just yet), you need some sort of paper equivalent.

JanNL
JanNL
4 years ago

I don’t quite follow. If gold is quoted in dollars or vice versa then an inverse correlation is baked in. For a comparison both gold and dollars should be priced in a third item.

Scooot
Scooot
4 years ago
Reply to  JanNL

If I buy Gold, I pay sterling for it. It won’t affect the dollar, I buy dollars (because Gold is priced in dollars) then sell them again to buy Gold, albeit in one transaction.

TheLege
TheLege
4 years ago
Reply to  JanNL

It’s the $ index or the trade weighted dollar, not the dollar in isolation.

lol
lol
4 years ago

Massive borrowing by govt,far far far more then the (pretend)1 trillion dollar deficit projections,real deficts YOY tracking over 3 trillion (at least) probably closer to 4-5 trillion,that’s what driving repo madness,theJCB,BOE,PBoC are printing like crazy to buy all that US dept on top of there own dept buying time for the dollar……for now!

Stay Informed

Subscribe to MishTalk

You will receive all messages from this feed and they will be delivered by email.