“The dollar will collapse and gold will go through the roof!” This is a statement that has been made for many years and, of course, the opposite has happened…so far.
Why do people say this? Two main reasons are usually given: 1) a collapsing dollar is inflationary and people will buy gold as a store of value and 2) gold and most commodities trade inversely to the dollar since it is the “measuring stick" by which most tradable goods in the world are priced (see interview with Steve Forbes from last year on the problems related to this).
Since we haven’t seen the first scenario play out of a dollar collapse and massive inflation yet, I have noticed that gold commentators are beginning to question the second reason given—that is, gold and the dollar trade inversely—as it becomes more widely accepted that the dollar’s rally may be in its early stages.
So, let’s get to the bottom of this and see what the data tells us.
Here’s a very long-term chart of gold and the dollar going back to 1980 with the correlation between the two shown beneath. As with most inter-market relationships, the correlation is not fixed but changes over time, which is probably why there’s so much confusion on this issue.
From the chart above we can see that when the dollar tends to rise, gold tends to fall and vice versa. The strength of this inverse relationship between the two is made even more apparent when we look at the amount of time that the correlation remains within the green (strongly negative) region over prolonged periods. On the flip side, the two have only seen a strong positive correlation for a sustained period (a year or more) on a few occasions over the past 34 years (red circled regions above). Thus, the inverse relationship between the two is quite strong and persistent over long time frames. When the dollar is rising, the overall trend therefore for gold is negative.
What if we look at it on a much shorter time scale—perhaps over a year? In that case, again, we see that the overwhelming majority of the time, both the dollar and gold trade inversely to one another but may for a brief period of time move together.
What this tells us is that, so far, this relationship has held quite strongly over the long-term but, like most things, will deviate now and then. It also tells us that if the dollar continues to push higher, this should put pressure on gold and most commodities. Conversely, if the dollar weakens, we should expect to see gold get a lift. Of course there are a lot of factors at play here but, so far, there’s still no reason to question the longstanding inverse relationship between these two important areas.
Have any questions or comments? Feel free to email me at [email protected].
Related:
Study: Long-Term Rise in the Dollar Does Not Bode Well for Gold
