Wikinvest Wire

What's up with the dollar and gold?

Monday, February 09, 2009

Those of you who have noticed that the U.S. dollar and gold have been moving in the same direction over the last few weeks are not alone. In fact, the two have moved together eight days in a row and nine out of the last ten, something that is quite unusual.
IMAGE When looking at the PowerShares DB U.S. Dollar Index Bullish ETF (PCX:UUP) and the SPDR Gold Shares ETF (PCX:GLD), it's clear to see how different the last couple weeks have been as compared to earlier in the year.

Based on the data for these ETFs (which, unfortunately only goes back to early 2007 for UUP), the two have moved in the same direction on just 150 out of 490 days - about 30 percent of the time.

As shown in the chart below, the recent surge to much higher levels has not happened in at least two years, probably much longer.
IMAGE The only other time that something similar happened was back in January of 2008.

What else happened in January of 2008?

Ahhh... How soon we forget...

From the St. Louis Federal Reserve website:

January 11, 2008
Bank of America announces that it will purchase Countrywide Financial in an all-stock transaction worth approximately $4 billion.

January 18, 2008
Fitch Ratings downgrades Ambac Financial Group’s insurance financial strength rating to AA, Credit Watch Negative. Standard and Poor’s place Ambac’s AAA rating on CreditWatch Negative.

January 22, 2008
In an intermeeting conference call, the FOMC votes to reduce its target for the federal funds rate 75 basis points to 3.5 percent. The Federal Reserve Board votes to reduce the primary credit rate 75 basis points to 4 percent.

January 30, 2008
The FOMC votes to reduce its target for the federal funds rate 50 basis points to 3 percent. The Federal Reserve Board votes to reduce the primary credit rate 50 basis points to 3.5 percent.
This was the really steep part of the rate reduction cycle - 125 basis points in just over a week.

Whether any of this has any real significance remains to be seen, but, the fact that, last time around, the gold price then surged to over $1,000 an ounce should not be ignored.

I, for one, will be happy to see the inverse relationship between the dollar and gold go the way of the dodo bird, never to affect twitchy traders again.

As noted here on many occasions before, there is no fundamental reason for this relationship to exist. If the dollar strengthens against the euro, why should that make the gold price go down? Because gold, priced in dollars, has become more expensive in Europe?

Despite hearing that ad nauseum in the financial media, that really doesn't make any sense when you think about it.

Full Disclosure: Long GLD, no position in UUP



Chaz Sanderson said...

Very interesting observation on gold vs. US Dollar. Any thoughts on NXG (Northgate Minerals Corp)? It's trading very well lately, has earnings, a low PE at 11 approx and only approx. 254 million shares outstanding. Total market cap is under $350 million.

Tim said...

No, I don't really know anything about Northgate Minerals. There's lot of mining companies out there of all sizes that are going to do quite well over the next couple years.

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