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December 22, 2019 | Gold’s vs the US Dollar: Correlation Is Not What Most Think

Mike 'Mish' Shedlock

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Gold is not as correlated to the US dollar as 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


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

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December 22nd, 2019

Posted In: Mish Talk

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