Gold and the Dollar, Rising Together

If you haven’t caught it already, in my Daily Currency Focus on FX360, I talked about What the Rally in the US Dollar and Gold is Telling Us. As both the Dollar Index and Gold Prices press higher, it important to know what this means:

It is not very often that we see the US dollar and gold prices move in the same direction. Since gold is priced in dollars, the value of the yellow metal tends to fall when the dollar rises and rise when the dollar falls. However this has not been the case since January 14th as the rally in the US dollar corresponds with the rise in gold prices, which closed today at a 7 month high of $970 an ounce.

The last time we saw this traditionally negative correlation turn into a positive one was in 1982. At that time, recession hit many countries including the US. Although the rise in gold prices can be partially attributed to future inflation problems, the cohesive movement in the value of gold and the US dollar suggests that central banks around the world are losing credibility. There are growing concerns that a time bomb could explode in Europe leading to more troubles for the region as a whole. If that is the case, there may not be any safer form of investment than gold.

The rally in the US dollar and gold is telling the market that investors are worried about global economic stability outside of the US and therefore they are preparing for the worst.



  1. Risk is rising in surprising places…
    risk of Japan default, as measured by sovereign CDS rates, leaped upwards today alone by 41 bps! it had been the lowest of G-7, at 58, only a week ago. (US was 80)

    for the week, the Japan CDS rate jumped a total of 61 bps to 119, a huge move, and seemingly correlated to a rapid weakening of the JPY

    Germany remains at 73 bps (the lowest!)
    France at 79
    USA at 82
    Italy at 192
    Ireland somewhere in the stratosphere above 375 bps (but of course, when your external debt = 900% of your GDP)

    and yet other than gold and DJI, most risk indicators are lower
    10 yr treasury down for the month
    TED spread down for the month
    oil down
    JPY repatriation not happening at rate expected

    a confused situation…

    are JPY and CHF both knocked off their risk aversion pedestal?, leaving only $.
    that will take some thought.

  2. This decoupling is strongly felt in the Australian dollar. Despite having a strong economy, and being a “commodity currency”, also Australia’s dollar gave in to the US dollar.

  3. The analyses for the financial markets ignore real production and employment, which markets enable or destroy. We can have a fleet of “investors” and “experts” who do not themselves work in producing roads, bridges, electronics parts, etc. Retail has been too large a sector for 20 years and the process of bloat began at least 30 years ago. As design-build firms, large and small construction contractors, and both union and non-union trades return to work, then supply-chain management and logistics firms will find increased volumes of trade. These increases will also improve on traffic levels at our trans-shipment centers and ports. Tax revenues will then increase. Housing construction which is based on realistic valuations other than fantasies of mini-millionaires will generate yields which are based on sound foundations – SHOULD WE HAVE THE WISDOM TO ESTABLISH SOUND AUDITS AND ENFORCEMENT OF REGULATIONS. This last is necessary since the millions of small traders and those large hedge funds and banks – although necessart to credit and liquidity – do not and never will possess the moral integrity, the education, the foresight or the wisdom to self-regulate. We live and work in a system of regulated markets, where one may travel to Oz to find the Wizard only then to discover, due to the intransiegent sense of a small dog, that the Wizard is not real. The entire group of “free market” advocates find their curtain cast aside by the small animal whom we call Toto (hence the name of those waste-disposal units built in Japan) but who also answers to the call of Common Sense when it is time for supper.


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