Dollar Weak, Gold Strong. The Most Popular Inverse Correlation

Typically, there is an inverse correlation between the value of the dollar and that of gold. When the dollar loses purchasing power, then the value of other currencies increases and so the demand for commodities. The investors look for alternatives to protect value: gold, a typical safe haven, is a preferred choice.

Not always the inverse relationship is true. There have been times when both assets have risen or fallen together. Many factors drive the U.S. dollar’s trends, like monetary policy, U.S. inflation, economic prospects. Nevertheless, the correlation coefficient calculated between the returns of the U.S. Dollar Index and the price of gold sticks, most of the times, around negative values.

The correlation coefficient is a statistical indicator that measures the degree to which the movements of two variables are associated. Its values may range between -1.0 and 1.0. Values near 1.0 reflect positive correlation, the two values tend to move in synchrony. Negative values mean that the two variables move towards opposite directions. The chart in Figure 1, is a good example of the inverse directionality between gold and U.S. dollar in the last two years.

Figure 1: Gold and Dollar Index, both base 100 on 31.12.2015. Lower window: correlation coefficient between the weekly returns of gold and Dollar Index calculated at 3 months.

The price of gold has extended the rally that had started in July and has broken above the resistance 1300, a psychological level but also the limit of the historical downtrend of the last six years. Such resistance had hampered numerous attempts to break above the highs of the first half of 2017. It is worth noting that the medium-long term indicators are well oriented and based on the strong foundation of rising lows. A possible target is around 1400, the Fibonacci projection 1.618 of the ascending pattern of the first half of the year, with a likely strong resistance around the highs of 2016 at 1375.

Figure 2: Dollar Index, weekly data 2011-2017.

Figure 3: Gold, weekly data 2011-2017.

Alberto VIVANTI – SAMT Vice President – Graubünden and Liechtenstein Chapter– alberto.vivanti@samt-org.ch

Disclaimer: the above article is for general information and educational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.