Wednesday, May 05, 2010

Gold And The Dollar

Above is a daily chart of gold and in the lower panel is the U.S. dollar. You'll notice that the two markets are negatively correlated which means when the dollar rallies, gold will usually be moving lower. The opposite is true as well, when the dollar sells off, gold tends to rally. You can see this relationship play out on the above chart up until the last few weeks.

Over the past few weeks the dollar has been moving higher which should have put downward pressure on gold but as you can see gold has been moving higher!  This in my view is bullish for gold because the fact that gold can rally in the face of a rising dollar means gold is rallying on its own fundamental considerations.

Today the dollar was sharply higher yet gold was still able to close in positive territory. My thinking is if we see any downturn in the dollar, that should boost the price of gold considerably. 

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