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The amazing dollar-gold relationship
Wednesday, October 01, 2008
There is no fundamental reason for the long-term relationship between the U.S. dollar and gold, but a relationship certainly does exists.
If someone knows of this reason, please fill me in.
When will people get it through their heads that, just because other currencies look "less bad" than the dollar from time to time (causing the dollar to strengthen against these other currencies), that this is no reason to sell gold?
Here's the chart:
4 comments:
Tim, I think this is self fulfilling prophecy, like much of what happens in the market. We say when dollar goes bad gold goes good, so it trades that way. Just like this "armogeddon" that Cramer says will happen with no bailout--if you make it so, it will. I think that down 700 points is big, but up however much yesterday made the move a net 400 or so drop, which we've seen before. There's your armogeddon, Cramer. Wasn't the whole problem with shorts that when the traders decide something's worthless it gets shorted into oblivion? Self fulfilling prophecy I tell you.
I agree with Evan. This falls under the category of "It works until it doesn't." There's so many arguments against the dollar and for gold out there these days.
Another one to check out is the inverse relationship between the Japanese yen and S&P 500. Why should the yen rally when the S&P 500 falls? There are some explanations, but it's only been true for a few yearsand it can't last. Chart farther back and the correlation disappears.
Why is there a long-term correlation?
Because enough people understand monetary history. Paper money never makes it...It is always inflated into oblivion.
Gold just sits and waits for its inevitable return.
Jeebus,
Long term correlation? Are we considering 1.5 years "long term" now?
Look at the chart for 10 years, or 20 years, 50 years, and 80 years, and the hypothesis falls completely flat.
Yes, I know the UDN did not exist then, but you can see the value of USD to other currencies for long periods of time as well.
Groupthink is a dangerous thing since it places a filter on our information.
Chuck
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