Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
INVESTING IN HIGH RISK TECH STOCKS - ALL OR NOTHING - 16th May 21
Is Stock Market Selling Madness About Over? - 16th May 21
Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
Budgies Birds of Paradise Indoor Grape Vine Singing, Chirping and Flying Parakeets Fun 3D VR180 UK - 16th May 21
Wall Street Roiled by Hot Inflation Data: Is This REALLY “Transitory”? - 16th May 21
Inflation Going Stag - 16th May 21
CHIA Coins After 1st Week of Plotting 140 Plot 14tb Farm. Crunching the Numbers How to Win - 15th May 21
Tips to Create the Best Cross-Functional Teams - 15th May 21
Gold: Lose a Battle to Win the War - 14th May 21
Are You Invested in America’s “Two-Hour Boom” Fast Shipping Stocks? - 14th May 21
Gold to Benefit from Mounting US Debt Pile - 14th May 21
6 Solid Signs You Should Have Your Smart Device Repaired Right Away - 14th May 21
Ways to Finance Your Business Growth - 14th May 21
Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
How Much CHIA Coins Profit from 100 Plot 10tb Farm? Hard Drive Space Mining - 13th May 21
Stock Market Bulls Getting Caught in the Whirlwind - 13th May 21
Legoland Windsor Mini land and Sky Train Virtual Tour in VR 360 - UK London Holidays 2021 - 13th May 21
Peak Growth and Inflation - 13th May 21
Where’s The Fed? Watch Precious Metals For Signs Of Inflation Panic - 13th May 21
Coronavius Covid-19 in Italy in August 2019! - 13th May 21
India Covid Apocalypse Heralds Catastrophe for Pakistan and Bangladesh - 13th May 21
TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
Gold Price During Hyperinflation - 12th May 21
Stock Market Extending Phase Two? - 12th May 21
Crypto 101 for new traders – ETH or BTC? - 12th May 21
Stock Market Enters Early Summer Correction Trend Forecast Time Window - 11th May 21
GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
Cathy Wood Bubble Bursts as ARK Funds CRASH! Enter into a Severe Bear Market - 11th May 21
Apply This Technique to Stop Rushing into Trades - 10th May 21
Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
CHIA Getting Started SSD Crypto Mining by Plotting and Farming on Your Hard Drives Guide - 9th May 21
Yaheetech Mesh Best Cheap Computer /. Gaming Chairs on Amazon Review - 9th May 21
Breaking US Trade Embargo with Cuba - Build 7 Computers in 14 Hours Before Ship Sales Challenge - 9th May 21
Dripcoin Applies New Technology That Provides Faster Order Execution - 9th May 21
Capital Gains Tax Hike News: Was It REALLY to Blame for Sell-off? - 7th May 21
Stock Market Transportation Index Continues To Grind Higher - 7th May 21
SPX Stock Market Correction Arriving or Not? - 7th May 21
How to Invest in an Online Casino? - 7th May 21
Gold & Silver Begin New Advancing Cycle Phase - 6th May 21
Vaccine Economic Boom and Bust - 6th May 21
USDX, Gold Miners: The Lion and the Jackals - 6th May 21
What If You Turn Off Your PC During Windows Update? Stuck on Automatic Repair Nightmare! - 6th May 21
4 Insurance Policies You Should Consider Buying - 6th May 21
Fed Taper Smoke and Mirrors - 5th May 21
Global Economic Recovery 2021 and the Dark Legacies of Smoot-Hawley - 5th May 21
Utility Stocks Continue To Rally – Sending A Warning Signal Yet? - 5th May 21
ROIMAX Trading Platform Review - 5th May 21
Gas and Electricity Price Trends so far in 2021 for the United Kingdom - 5th May 21
Crypto Bubble Mania Free Money GPU Mining With NiceHash Continues... - 4th May 21
Stock Market SPX Short-term Correction - 4th May 21
Gold & Silver Wait Their Turn to Ride the Inflationary Wave - 4th May 21
Gold Can’t Wait to Fall – Even Without USDX’s Help - 4th May 21
Stock Market Investor Psychology: Here are 2 Rare Traits Now on Display - 4th May 21
Sheffield Peoples Referendum May 6th Local Elections 2021 - Vote for Committee Decision's or Dictatorship - 4th May 21
AlphaLive Brings Out Latest Trading App for Android - 4th May 21
India Covid-19 Apocalypse Heralds Catastrophe for Pakistan & Bangladesh, Covid in Italy August 2019! - 3rd May 21
Why Ryzen PBO Overclock is Better than ALL Core Under Volting - 5950x, 5900x, 5800x, 5600x Despite Benchmarks - 3rd May 21
MMT: Medieval Monetary Theory - 3rd May 21
Magical Flowering Budgies Bird of Paradise Indoor Grape Vine Flying Fun in VR 3D 180 UK - 3rd May 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why Gold and U.S. Dollar Do Not Always Move Inversely?

Commodities / Gold and Silver 2014 Nov 19, 2014 - 12:50 PM GMT

By: P_Radomski_CFA

Commodities

Arkadiusz Sieron writes: The strength (or weakness) in the U.S. dollar is one of the most important drivers of price of gold. However, this is not always true and there are times when they rise or fall simultaneously. The positive correlation between U.S. dollar and gold occurred, for instance, from May through December 1993, from May until November 2005, and at the turn of the 2008 and 2009.


Graph 1: Gold (green line) and US Dollar Index (red line) from 2004 to 2009

Gold and USD Index Chart

Trends of the U.S. dollar and gold do not always align inversely, and even when they do, the percentage moves are not very well matched. Just think of the important rally in gold from 2008 to 2013, when the dollar was back where it was in late 2008. Also, peaks and troughs do not always align. Gold was rising when the dollar hit its peak in mid-2010.

Interestingly, those periods did not last long. What are the possible causes for such temporary aberrations? Capie, Mills and Wood's in their paper "Gold as a hedge against the dollar" claim there may be some supply shocks or central bank's (optionally government's) intervention in the market. The other possible reasons are expectations among foreign investors that the U.S. dollar exchange-rate changes are only temporary. Such opinion could make them endure fluctuations rather than change their portfolios in favor of gold (think about transactions costs).

However, medium or long-term trends were also affected: the traditional inverse relationship broke down during the two year period of 1978-1980. Such a long period calls for a more detailed analysis of the reasons behind disruptions in the negative correlation between gold and U.S. dollar in the medium or long term (but also in the short ones).

Graph 2: Gold (green line) and US Dollar Index (red line) from 1977 to 1981

Gold and USD Index Chart 2

First, changes in gold are sometimes driven upward not by relative weakness in the U.S. dollar to other fiat currencies, but, instead, by flight from all paper currencies. This was probably the case of 1978-1980, when investors feared global recession following the oil crises or the collapse of the world's monetary system (plus, gold was in the speculative buying mania stage at that time). Eventually they switched from all paper currencies to gold - the traditional store of wealth, historically chosen by the market to play the role of money. It should be clear now why the U.S. dollar was traded sideways to other currencies (all currencies were depreciating), while gold skyrocketed from $200 per ounce to $800 per ounce. It would be difficult to find a better argument why gold should be considered more like an international traded currency than just a simple commodity whose price is expressed in dollars.

The second reason even further strengthens the role of gold as the global currency. Gold can be an insurance policy against financial crashes or even collapse of the monetary system. However, the U.S. dollar exhibits similar tail risk properties. Greenbacks are also seen as the world's safe haven currency. The U.S. dollar is still the main reserve currency- over half of the total amount of greenbacks stock is held outside the USA and U.S. Treasuries are eagerly bought during crises. It should be clear now why the U.S. dollar and gold can move up or down together. Investors may choose both as safe havens: greenback and gold during global catastrophes or crises in another currency. The best example may be the period from November 2008 to February 2009, when both gold and the U.S. dollar were generally rising due to the financial crisis. Such a co-movement proved that gold behaves sometimes as a hedge against a dollar-denominated-system rather than the dollar itself. This is why gold is not only a hedge against stocks on average, but also a safe haven in extreme stock market conditions. Similar movement occurred in November 2010, when gold and the U.S. dollar rose together due to growing concerns about Ireland and the Euro zone's situation.

To sum up, a rally in gold while the U.S. dollar remains flat means that investors are concerned about the condition of the global economy and the international monetary system, while a simultaneous rally in the U.S. dollar and gold indicates that investors worry about the global economic stability outside of the USA and thus shift capital to the two most important safe havens. Although U.S. dollar is a fiat money, which systematically loses its purchasing power, it is still one of the best of the worst paper currencies, especially since capping the Swiss franc at 1.20 per euro in September 2011.

In order to stay updated on the latest developments in the gold market and US economy we encourage either joining our gold newsletter (it's free and you can unsubscribe in just a few clicks) or subscribing to our premium Market Overview reports (on which the above articles is based).

Thank you.

Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in