Wednesday, March 03, 2010

Gold And The Dollar



Gold and the Dollar are inversely correlated which means when the dollar moves lower, gold will most likely move higher. You can see this relationship in action on the above chart. Notice in early December when the dollar bottomed this coincided with a top in gold. On December 22nd the dollar began to sell off which once again coincided with a move higher in gold. I think you get the idea.

This inverse relationship continues to take place until about February 5th where we begin to see an interesting change take place. In early February gold began to rally without a corresponding down move in the dollar. In fact, the dollar moved higher to sideways which should have put pressure on gold but we simply did not see that. The fact that gold moved higher along with a rising dollar tells me that gold is moving higher based on its own fundamental considerations. If that's the case, this could be quite bullish for gold in the coming weeks especially if the dollar begins to sell off.

7 comments:

Anonymous said...

Great post as always Kevin....however, could it mean that investors still anticipating that the dollar will continue to remain weak?! The recent strength is just a techinical rebound?


George

Don's "Trading-In-Action (TIA)" said...

US$ and gold's inverse relationship is due more to the fact that most commodities are priced in US$....if US$ is down, somehow the price of these commodities will go up to compensate for the drop in US$. This inverse relationship will only continue to a point where eventually each will have to move based on its own merits. As for me, i never buy this theory of their inverse relationship. I trade what i see and this has never failed me other than the fact that i still have to deal with the game of probability of trading.

Marc said...

Is it fundamental or is it speculation? There are so many gold commercials on TV! It could be a bubble.

Anonymous said...

KP, i know this is unrelated, but have you seen the outperformance in the IWM? IWM made a 52 week high today. SPX not even close. Something is definitely brewing here. Looks like we broke the neckline on the SPX and if we truly follow through on a reverse head and shoulders, S&P could be 1200+. Just tough when the S&P grinds 30bps on zero volume everyday.

Naso said...

99% of the commercial the past year or so has been trying to buy gold from the average Joe. I have never seen that before in my adult life. TV commercials supposed to sell you stuff not buying from you. So it is not a bubble. It is a bubble when every person around you trying to buy gold and every TV commercial is trying to sell you Gold and Gold coins etc.

Anonymous said...

Any updates on the gold trade? Is this a good time to enter? The daily TA looks toppy to me.

banker said...

Kevin, on another topic...The Euro. It seems to me it is ready to break higher. I have heard from people looking to sell at 1.3800 for weeks. Now that we are near the level they will attempt to sell but I think things are different. The Fed is keeping rates low and I think a big part of the Euro move was on the back of higher rates in the States. Not happening now. These will be weak shorts which should easily be taken out.

Thoughts?

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