Outsider Image of the Week
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The common belief amongst investors is that when the U.S. dollar goes down, gold goes up. In other words, an inverse correlation exists. There is a bit of a problem though… There is no inverse correlation. Check out the correlation below a chart of the US Dollar Index and gold spot prices:
There is no rhyme or reason for correlation to jump erratically over the three-year period, sometimes with the trend reversing several times a month. There is no inverse correlation; if there was, we’d see a much flatter line hovering near -1. However, it is clear that there is a weak partial inverse correlation. There is a whole lot more blue than red in that correlation chart. This shows that gold prices rise more often than not when the dollar drops, but many other factors are involved. It would be virtually impossible to quantify everything that influences the spot price of gold and the relative value of the dollar. There are simply too many influences at play, and way too much data. There are two simple conclusions to draw from this: 1. The strength of the U.S. dollar doesn’t set the value of gold; and 2. The value of gold is poorly defined by the U.S. dollar. |
