Guest Post: Gold & The Dollar Are Less Correlated Than Everyone Thinks

Tyler Durden's picture

Submitted by Charles Hugh-Smith via Peak Prosperity,

Whenever I make the case for a stronger U.S. dollar (USD), the feedback can be sorted into three basic reasons why the dollar will continue declining in value:

  1. The USD may gain relative to other currencies, but since all fiat currencies are declining against gold, it doesn’t mean that the USD is actually gaining value; in fact, all paper money is losing value.
  2. When the global financial system finally crashes, won’t that include the dollar?
  3. The Federal Reserve is “printing” (creating) money, and that will continue eroding the purchasing power of the USD. Lowering interest rates to zero has dropped the yield paid on Treasury bonds, which also weakens the dollar.

The general notion here is that, given the root causes of our economic distemper – rampant financialization, over-leverage and over-indebtedness, a politically dominant parasitic banking sector, an aging population, overpromised entitlements, a financial business model based on fraud, Federal Reserve monetizing of debt, and a dysfunctional political system, to mention only the top of the list – how can the USD appreciate in real terms?

All of these objections are well-grounded. Let’s look at some charts to discern what factors are “pricing” the dollar, domestically and internationally.

Before we start, though, let’s spend a few moments thinking through what a declining dollar means in the real world.  Since the USD is the world’s reserve currency, we have to ask the question in two contexts: the domestic economy and the global economy.  The Triffin Paradox explains why the domestic monetary policy of the nation that issues the reserve currency will conflict with the needs of the international community using the currency for reserves.

Let’s say that thanks to a depreciating dollar (what many call “inflation”), gasoline that once cost 40 cents a gallon now costs $4 a gallon.  Back when gasoline cost 40 cents a gallon, the average wage was $1.60, so an hour of labor could buy four gallons of gasoline.

This ten-fold rise in the cost of fuel would certainly be catastrophic if earnings didn’t rise as well.  But if earnings rose to $16 per hour, then an hour’s labor would still buy four gallons of gasoline.  If gasoline rose to $4,000 a gallon, if earnings per hour also climbed to $16,000 per hour, then the purchasing power of an hour’s labor would remain constant.

If wages rose such that an hour’s labor bought five gallons of gasoline, the wage earner’s purchasing power has actually increased despite the apparent 90% drop in the value of the currency.

This suggests that a depreciating currency is not a domestic catastrophe unless earnings (and assets) do not rise in lockstep with the price of goods and services.

In terms of the international community, a depreciating dollar means oil exporters paid with dollars (so-called "petro-dollars") will have to raise the price of oil to offset the depreciation, and this could wreak havoc on other nations importing oil.  In other words, the U.S. “exports inflation” by depreciating its currency, which is precisely what happened in China: Inflation leaped in China while it remained placid in the U.S. (at least by official calculations).

No wonder understanding the dollar’s value is so complex; it plays a duel role as the reserve currency and the U.S. currency, and it is influenced by a large number of domestic and international forces.

Charting the Dollar and the Metrics That Influence Its Value

Let’s start with two charts showing the dollar’s massive decline in domestic value over the past century and half-century.

From the long view, the USD had already lost 30% even before the Federal Reserve was founded. The much-discussed end of the gold standard (when the USD was no longer backed by gold) in 1971 had little effect.

Here is the dollar from 1947 to 2008.  In 1970, it was worth $0.60, and it has since slumped to $0.10 in constant 1947 dollars.  This is confirmed by the BLS inflation calculator, which equates $1 in 1970 with $6 in 2012 dollars.

That is a nasty decline in 42 years, to be sure.  Now let’s look at gross domestic product, earnings, and the size of the population and workforce.

According to the Census Bureau, the population of the U.S. was 203 million in 1970, and it is now 307 million, a roughly 50% increase.

The number of workers has risen 75%, from 80 million in 1970 to 140 million today.

If productivity remained constant, we might expect that gross domestic product would rise by 75% due to a larger workforce and the six-fold increase due to depreciation of the dollar. Since GDP was $1.038 trillion in 1970, we could expect $1T X 1.75 = $1.75T X 6 = $10.5 trillion. Actual GDP is over $15 trillion, a 50% increase over the adjusted-for-workforce-inflation result.

Here is the adjusted (real) GDP:

Adjusted for inflation/dollar depreciation, the GDP has tripled since 1970. Even if we discount half of this as official under-reporting of inflation, that is still a significant increase.

Next, let’s look at the critical metric of employee compensation. Did earnings rise along with prices?

It appears that earnings rose almost fourteen-fold while costs rose six-fold.  Thus “real” earnings increased despite the depreciating dollar.  Here is a chart of real household income, courtesy of

Here we see income disparity at work.  Lower-income workers saw their real (adjusted) earnings rise by about 20%, middle-class employees registered gains of around 40%, while the top 20% realized gains of about 70%. The top 5% has seen real income almost double.

Note that the income in all brackets has declined or stagnated since 2000.

Now let’s look at some other basic measures of economic activity: corporate earnings and government spending.

Corporate profits have zoomed over thirty-fold since 1970, while Federal spending has increased about eighteen-fold.

Federal tax receipts have increased about twelve-fold.

What does all this mean? It appears that a steadily depreciating dollar did not harm the nation’s output, earnings, corporate profits or government spending.  Though rising income disparity is troubling, it cannot be traced to the depreciating dollar.

Next, let’s look at the three factors most often mentioned as setting the value of the dollar internationally: interest rates, the monetary base, and gold.

Interest rates, measured here by the yield on the ten-year Treasury, topped at 16% in 1982.

If interest rates drive the value of currencies, we would expect to see the dollar rise and decline along with interest rates. Here is the trade-weighted dollar, valued against a basket of our trading partners’ currencies.

The correlation is not perfect, as the USD peaked in 1985, triggering the Plaza Accord, a concerted campaign by central banks to depreciate the dollar against rival currencies. Nonetheless, the USD has trended lower as interest rates fell.

Here is the monetary base of the dollar, which skyrocketed as the Fed ramped up the base in response to the global financial crisis of 2008-09.  If this was a dominant force on the dollar, we would expect to see a corresponding decline in the trade-weighted dollar and a leap in the USD price of gold.

The trade-weighted dollar is about where it was before the three-fold expansion of the monetary base.  Gold did skyrocket, roughly doubling from its 2008 price range to about $1,750 per ounce today.

But if the price of gold were correlated to the trade-weighted dollar, we would expect to see a rise in gold as the dollar fell from its 1985 peak.  It did not, but it did rise as the USD declined from its 2002 peak. In other words, the correlation of gold to the trade-weighted USD is very inconsistent; the USD has remained in a small range since 2008 while gold doubled.

Gold and the USD have actually risen together in some timeframes.

If we step back, what do we notice about the charts of GDP, employee compensation, corporate profits, government expenditures, and gold?  Roughly speaking, all have increased ten-fold or more from 1975. From this point of view, gold has simply “caught up” with earnings, GDP, profits, government spending, etc.

While the dollar’s value against other currencies has declined as bond yields dropped, from the long view its 2009 value places it back in a range going back two decades to the early 1990s.

Though the monetary base roughly doubled from 1990 to 2005, gold in 2005 was still around $400 per ounce, same as its price back in 1990.

In other words, the price of gold is not consistently correlated to the monetary base, the trade-weighted dollar, or interest rates. Gold appears to march to an independent drummer.

A Distinct Lack of Consistent Correlations

Where does this comparison of charts leave us? With a distinct lack of consistent correlations.

[ZH: though we note in the very recent past that correlation 'mathematically' has risen consistently]


It would seem that the commonly touted drivers of the dollar’s value, measured in either trade-weighted USD or in gold, are inconsistent; none of them correlate consistently over time.

The three metrics of interest rates, gold, and the trade-weighted dollar appear to have minimal impact on productivity, profits, output, earnings, or the domestic standard of living, as these three have jumped around with no visible impact on broad measures such as GDP or earnings.

We have seen interest rates leap to 16% and fall to near-zero; gold collapse, stagnate, and then quadruple; and the dollar gain and lose 30% of its trade-weighted value in a few years. None of these huge swings had any correlation to broad measures of domestic activity such as GDP.

Clearly, interest rates occasionally (but not always) affect the value of the trade-weighted dollar, and the monetary base occasionally (but not always) affects the price of gold, but these appear to have little correlation to productivity, earnings, etc., or to each other.

In Part II: Why Gold & the Dollar May Both Rise from Here we explore the key question: Given the low correlation of the dollar’s value to gold or broad measures of the domestic economy, what will its relative rise or decline mean in the domestic and international economies?

Click here to read Part II of this report (free executive summary; paid enrollment required for full access).

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Spitzer's picture
  1. The USD may gain relative to other currencies, but since all fiat currencies are declining against gold, it doesn’t mean that the USD is actually gaining value; in fact, all paper money is losing value.

Closet dollar bulls favorite line



redpill's picture

'No wonder understanding the dollar’s value is so complex; it plays a duel role as the reserve currency and the U.S. currency, and it is influenced by a large number of domestic and international forces.'


It's a duel alright, a duel to the death.


true brain's picture

of course gold and dollar don't correlate. have u heard of gold price suppresion. make the whole article silly without mentioning central bank suppression of gold.

strannick's picture

With currency swaps occuring between all the major currrencies, (China, Japan, Germany, India, Russia, ect.) seems silly to look at things in terms of the USD as the worlds reserve currency for much longer. When the US loses its exhorbiant privilege, then all these shitbird dollars fouling the world come home to roost, and crap hyperinflation all over the place.

Turkeys President two days ago noted the absurdity of nations transacting business between each other in USDs and wherefore gold??


" This post was brought to you by : Reggie Middleton Chart Porn Incorporated.

Look for the loin cloth and spear seal of approval on all Reggie Middleton products - to make sure you are getting the very best. "

BLOTTO's picture

DO NOT let all this - '2012 technology' - fool you/us.


History IS repeating itself


Nothing new under the Sun


Its all an occult shit show - same as it ever was...





francis_sawyer's picture

you forgot to say... "dum dums"...

Spitzer's picture

When the global financial system finally crashes, won’t that include the dollar?

The dollar is the global finanical system.

LawsofPhysics's picture

For now.  Those buying into the dollar now are buying into a HUGE dip (for reference, review what happened to the Russian Ruble).

ghostfaceinvestah's picture

OT: so much for Manal Mehta/ZH's favorite BAC short - MBI.  TIMBERRRRR!!

Spitzer's picture

The Federal Reserve is “printing” (creating) money, and that will continue eroding the purchasing power of the USD.

Even if the Fed stops printing, it has no control over the velocity of the dollars that already exist. When capital flight takes hold, Bernanke wont be able to stop it in 15 minutes.

A Lunatic's picture

Gold is money. Fiat is trash. No correlation at all, pretty black and white.

Crisismode's picture

Yes, but you can purchase gold with fiat trash. All the gold you want to buy, you can purchase with fiat.


Why is that?


Peter Pan's picture

What you say is true but only for now. You will always be able to exchange gold for fiat, but the day will arrive when you will not be able to buy gold with fiat. It has happened countless times before and will happen again. We are headed towards that breaking point anyway.

When the world wakes up to the disaster called unfunded liabilities, do you believe that fiat or gold will buy you the necessities?

Crisismode's picture

There will always be some form of fiat.

When the Weimar hyperinflation finally ended, a new fiat -- the Rentenmark, backed by real estate, not gold -- was conjured into being.

True, all fiat currencies come to an end, but there are always new ones being issued. Do you think that if the dollar collapsed, that within a few hours, days, weeks, there would not be a "New Dollar", "Amero", or "Whatever" that would be issued, supposedly backed by "Something"?

Even in the few communities that issue scrip, redeemable within a small geographical area, and backed only by "trust", it is still just paper.

Fiat will be with us forever, in one form or another.



LawsofPhysics's picture

So basically anything physical of real value is what you want to hold.  Great, thanks for confirming. While fiat may be with us forever, it requires trust and world wars have and will be fought while adressing the moral hazard and re-establishing that trust.

e-recep's picture

yes, it's like a sine wave. life itself is like a sine wave.

this site did not exist until recently and will disappear when things get back to normal, say 10-15 years from now, because the demand for this site will disappear.

mogul rider's picture

you've read to much martin armstrong dude

e-recep's picture

no, kondratieff is a better guess..

but as for martin armstrong, was he wrong in 1987 or in 1989 or in 1998?

i ask thee, was he?

Papasmurf's picture


If wages rose such that an hour’s labor bought five gallons of gasoline, the wage earner’s purchasing power has actually increased despite the apparent 90% drop in the value of the currency.

This suggests that a depreciating currency is not a domestic catastrophe unless earnings (and assets) do not rise in lockstep with the price of goods and services.


Right.  It's not a catastrophe to be ass-raped by fed-caused inflation when you're a retiree who saved in attempt to provide for self-sufficiency.  It's of no consequence of all.

socalbeach's picture

And the Y axis of his dollar Purchasing Power chart needs to be on a log scale, since it looks like the dollar's decline has levelled off being plotted on a linear scale.

francis_sawyer's picture

All I remember is this... My first [payroll] job was as a dishwasher for $2.75 an hour... Gasoline was .63 cents a gallon... (4.37-1 ratio)...

Minimum wage now is $7.75 & gasoline averages around $3.50...

No other comments (other than 'bankers' pay the same amount for gas that everyone else does but they don't work for minimum wage)... That's all most people understand...

Toolshed's picture

It's all becoming voodoo and parlour tricks as logic and reason, not to mention mathmatics, flee in terror. The key to your quoted section is "(and assets)". It all depends on where the savers retirement funds are stashed. If they are savings as in a savings  account or CD's, the retiree is truly and totally being screwed by Benny and his ZIRP to infinity. If in gold, it's a whole different ballgame. So really, it amounts to a crap shoot, as in pure luck. Today, if you are inclined to try your luck with the markets, you would be wiser to go to Vegas and try your luck at the tables. Better odds for sure.

Cheduba's picture

It's a good thing wages haven't been stagnant for decades.  With underemployment at 22% including the new 29 hour Obamacare workweek, the outlook for wages keeping up with that depreciating dollar is fantastic!

Quinvarius's picture

There is no currency "market".  All paper money is the same thing as long as central banks cooperate to set exchange rates.  There is no mystery here.  All paper money is the dollar.  So don't expect me to read anything into a dollar index chart.  You have two choices; gold or any piece of fiat paper currency you choose that the US Fed sets rates for.

AgShaman's picture

Cooperate, collaborate, manipulate

....whatever central wankers are doing with the exchange rate

The proles is gonna get "ate"

Toolshed's picture

It seems to me that an analysis such as this using increasingly questionable government supplied data and indicators such as values and rates that are constantly being manipulated will produce data that is of dubious value at best. Am I wrong? I would appreciate others views on this.

Bullionaire's picture

You are correct.  Smith produces some very valuable articles, but some, like this one, are real clunkers.

machineh's picture

Fifteen charts, the word 'correlation' in the title -- and not a single numerical value cited to prove the contention.

Read this, revise the essay, and maybe I'll raise the author's grade from D-minus:

And no, you're not gonna find a rolling correlation chart on FRED. This takes actual, you know, math. Sorry.

dugorama's picture

my view is apparently the south end of a north bound.......

Jack Sheet's picture

We are heading for an absolutely devastating deflation. Chevy Volts for $100 each and a college education for $850.

CashIsTrash's picture

deflation when priced in gold/silver...hyper-inflation when priced in currency

ParkAveFlasher's picture

"The three metrics of interest rates, gold, and the trade-weighted dollar appear to have minimal impact on productivity, profits, output, earnings, or the domestic standard of living, as these three have jumped around with no visible impact on broad measures such as GDP or earnings."

IMO productivity, profits, output, earnings, and the domestic standard of living are functions of individuals riding the winds, waves, crests, and troughs of interest rates, gold, and the dollar. 

Rarely do you see an article that basically declares that everything is actually working precisely as one should intuit, exactly as it should.  All attempts of forced manipulation upon interest rates, gold, and the dollar will be met by equal, opposing forces to obtain and crystallize corresponding offsets in productivity, profits, output, earnings, and the domestic standard of living.

Nice refresher to the constant hazy glare of doom and gloom.  thanks, Tylers.

rustymason's picture

"international community" Gufaw.


I have to poop.  Paper sucks, you Wall Street fucks! I'll see you vampires in the sun, with my loaded silver gun. Yer goin' down in flames, from Lower Manhattan to the Thames. Your paper is I know not where, I'd rather shit my underwear!  For, be there bull, or be there bear, silver is the suit I wear! (With gratitude, and apologies to Dr. Seuss.)


The only paper I own is the stuff I wipe my ass with. Market paper is worthless, because I cannot do a good job of wiping my ass with it. Gold was worth $28.00 an ounce when I was a kid. Silver was worth whatever was printed on the coin you spent. Any one think those days are coming back? All of the lying bum fucking aristocracy of the Age Of Paper Power can burn in their paper suits soonest. I won't even bother pissing on them to put out the flames.

I collect gold, silver, lead, copper, real dry powder, food, tools, diesel fuel, and other useful commodities. There is a community of folks all doing the same, so skill sets and extra eyes and hands can guard each others sixes. Get real, bitchez.  "

HFT ain't good for me. 

Credit defaults far as the eye can see.


CDS's gonna make some messes. 
Boo hoo hoo as thieves confesses.
TBTF gonna fall off a cliff - REAL NEAT.
Wall Street is a bunch of fucking dead meat.


Banks used to be so overleveraged bold.

Now, they're layin' bankrupt,dead and cold. Gonna be nothing but prepper people, all the rest gonna be surprised fucked up Sheeple. God bless this mess. I must confess. I'm a fucking poet,


and didn't even know it.


LawsofPhysics's picture

Wait, are we talking about paper or physical gold.  There is a difference.

AustriAnnie's picture


I don't know about paper gold, but MY gold is worth $5,000.  Because I would not consider parting with it for less.  In fact, it might take more, to compensate me for the hours it will take to get it back up from the bottom of the lake.

Strong hands, stock and flow and all that.......

centerline's picture

The depreciation of the dollar was not realized in the traditional monetary sense since 1971 as a result of creative financial instruments - facilitated by the coming of the digital age.  Leverage upon leverage through relaxed regulation (wonder why?) in an electronic global economic system that has progressive been taken over by self-serving finance.  Growth of shadow banking to feed the monster.  The net result is trillions and trillions of hidden damage that when unwound runs the risk of creating a real disaster should the chain of counterparty exposure be broken.  Even if this aspect is controllable, yield is tapped out.  Macroecomonic debt saturation has arrived... crammed down in fact via bubble after bubble.  Since the entire system is built on perpetual growth, this clearly is not going to end well.  Chicken or egg?  Not that it matters at this point.  The current system is exhausted from both ends (e.g. places to hide and ability to expand).




ronin12's picture

"It appears that a steadily depreciating dollar did not harm the nation’s output"


How can you possibly make this conclusion?


It's impossible to know how much higher the nation's output might have been, had the Fed not aggressivley debased the dollar and drove huge misallocations of capital (ie tech bubble, housing bubble, treasury bubble).

ParkAveFlasher's picture

If a nation that imports American goods settles with reserve fiat, and if that fiat is actually the USD or under the influence of a peg, what would be the net detriment to the US economy if the US economy still exports real goods?

AS long as the crops continue to grow, and as long as produce is not intentionally destroyed, and it is exported or stored for later export, what impact would a blizzard of paper really net?

juslen's picture

Good to see someone else gets it.

francis_sawyer's picture

Dollar to Charmin bathroom tissue... Now THAT's a better correlation...

Tuco Benedicto Pacifico Juan Maria Ramirez's picture

"Gold appears to march to an independent drummer."

Yes, gold like silver marches to the drum beat of naked shorters at JPM and other demonati terrorist organizations!


The Bernank's picture

Gold is used to manage what we call "tail risks"...really bad outcomes.  It has a traditional use in managing fear, but it really has no functional use in today's economy.  And I certainly would not say that it's "money" in any way at all.  Any correlation to the dollar at all is purely coincidental, as our policy of Quantitative Easing is helping the economic recovery and demonstrating that this invention we have, called a printing press, can provide all the security needed in the modern economic climate.  

ParkAveFlasher's picture

If it has no functional use, why not auction it?

centipede's picture

He, he, invention called printing numbers od the paper can provide security? Weimar and Zimbabwe were obviously the most secure places on the planet. :-)

Acctually, the beauty of investing in gold is exactly that it is not closely correlated to the dollar or monetary base. You can comfortably invest into it for years at very low prices and know with almost certainty that at some point it will catch up with the monetary base. You don't know what you have missed. :-)

AustriAnnie's picture

This article makes me ask several questions:

1) Can we really make any of the above claims using GDP as a measure of "productivity"?  (is debt-fueled gov't activity really productivity, or can those figures go into the category of past consumption that will have to be paid for in future years? The earnings and GDP figures of past years includes credit-based illusions of wealth that still have to be paid for. Yet, the article seems to include debt-fueled producitivity and earnings as real wealth. )

2) Can we isolate household earnings without taking into account the role that household debt has had in their purchasing power (or illusion of purchasing power over a short period of time)?  Can we make claims about household purchasing power when households were just trading "purchasing power today for purchasing power tomorrow" by going into debt?  Governments as well?  

The expansion of debt/credit that has already occurred implies either future a) default (which would affect GDP/earnings if suddenly excess claims to underlying wealth go up in smoke), or b) money printing of dollars to close the gap (affects value of USD).   i.e. future money printing to fill a debt hole AND/OR lower real productivity in order to pay for past consumption. Part of past GDP numbers should be matched with future labor hours worked. 

Credit distorts the relationship between the value of the USD, GDP, earnings/purchasing power, and interest rates whenever it is not based on real sound money. Which is exactly the point that those ppl who see future dollar devaluation are trying to make.  The relationship between hours worked, the stuff we buy with those hours worked, and the money we use to store hours worked for future consumption, is broken.  Of course there is no correlation! I think the argument is that the dollar devaluation comes about when the distorted, uncorrelated variables of labor, cost of credit, and consumption/production come back into balance.  This article does not provide a rebuttal of that argument that satisfies me.