About That Supposed Correlation Of The U.S. Dollar And Gold...

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The supposed correlation of the U.S. dollar and gold is not visible in the 5-year charts.

 
One of the most widely accepted truisms in what passes for our financial media is that the dollar and gold are correlated: when the dollar weakens, gold rises, and when gold rises, the dollar declines.
 
Nice, except this vaunted correlation isn't remotely visible in the charts. Let's have a look. Here is the 5-year chart of the DXY Dollar Index, the most widely quoted measure of the U.S. Dollar:
 
 
And here is a 5-year chart of GLD, a proxy for gold:
 
 
I've marked the charts up seeking the sort of correlation that is accepted with near-religious faith and come up with near-random fluctuations. Let's start with the basics of correlation:
 
1. Do the peaks and troughs align? No, they don't. If gold and the DXY were correlated, we'd expect gold to bottom when the dollar peaked and the dollar to hit its lows at gold's peak. Instead, we find gold was rising when the dollar hit its last peak in mid-2010.
 
At gold's peak, the DXY was around its previous lows hit in 2008 and 2009. At the dollar's previous low in 2008 at 72, GLD was around 100; at the dollar's next low in late 2009 at 74, GLD was around 110. At the low in 2010 at 73, GLD was 150.
 
Conclusion: the peaks and troughs do not align--not even close.
 
2. Do the trends up and down align inversely? In other words, when gold is rising, is the dollar declining, and vice versa? Nope. The supposedly inversely correlated DXY and GLD have risen in tandem for several significant stretches of time.
 
We can play mind-games and claim the correlation inverted during these periods, but what would we base this claim on? Why did the correlation invert during these periods?
 
3. Were major uplegs/downlegs matched by similar percentage moves in the other index?If there was any sort of real correlation, we would expect to see a 30% rise or fall in one align with a similar-sized inverse move in the other.
 
For example, gold dropped by 30% since October 2012, yet the DXY rose a mere 5% in that period, crossing a price line it has crossed 9 times before.
 
When the DXY rocketed up 20% from late 2009 to mid-2010, we'd expect gold to plummet by 20% in the same timeframe. Instead, gold rose in tandem with the dollar.
 
4. If one has climbed by 70% since late 2008, the other should decline by roughly 70%.Instead, the dollar is back where it was in late 2008 at 84, a price level it has crossed 10 times since late 2008.
 
Gold has risen 70% from its late-2008 level. How are these dramatically different price movements correlated?
 
Conclusion: there is no correlation between gold and the U.S. dollar index. Not even close.The two move independently; any apparent correlation is semi-random signal noise. They are not on a simplistic see-saw.
 
In my view, this reflects the complex dynamics at work in pricing gold and the U.S. dollar:
 
 
 

 

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fasTTcar's picture

The only correlation that I see is that I am using my dollars to buy gold.

Spider's picture

Very needed point!

On that note, us common folks can help the cause and break the banks by taking control of the silver market - an interesting concept and much needed today for silver investors:

http://www.communitysynergy.com/subscribe/silver_pledge_site.html

BaBaBouy's picture

The CORRELATION Is That The US Manipulates GOLD Down, And The Paper Fiats USD Rises And Looks Strong And Healthy (A La Fairytale).

It Has Worked Up To This Point.

The Uninformed Sheeple Believe It And Still Live By It.
It Will Not Last.

Meanwhile The Non-paper GOLD Supplies Continue To Be Shipped To ASIA etc...

AS Evidenced By JPM/Brinks Vaults, Comex And ETF's ...

Stuck on Zero's picture

The correlation between the dollar and gold is not in price but in quantity.  The more dollars out there the higher gold goes.  It's as simple as that.

 

LawsofPhysics's picture

Gold/Oil is far more interesting when one considers the application of "mark to fantasy" and the lack of collateral relative to all the paper promises floating around.

Interesting tidbet.  I spoke with the CEOs of two prominent venture capital funds.  Both stated flatly that "gold is irrelevant in modern finance" and "silver will have more relevance because of the great use in manufacturing".

Yes, it true.  These ivy league insiders really believe the gold is irrelevant and they are in fact "chosen" people.

Hedge accordingly, as this ends as it always has, world war...

fonzannoon's picture

Laws I hope if you decide to do business with those CEO's, even as a bluff at first, you make it clear that you prefer to be paid in gold.

Surly Bear's picture

Looks like a very long walk.

LawsofPhysics's picture

I am okay with "favors" too.  The movie The Godfather is an essential part of my understanding of basic economics as well...

Remember what this is really about Fonz, power and control over real resources, period.

In the end, nothing else matters.

MachoMan's picture

Induction (history/statistics) does not necessarily have anything to do with the present situation.  I'm not sure that these things end in world war anymore...  at least not in the same ol' overt way...  everything is by proxy now...  wars that in yesteryear we didn't call world wars.  I'm also really doubting the propaganda machine at this point...  we're pretty long in the tooth of the war on terror.  Even if they trot out that TWA flight 800 was shot down by an Iranian missile, I'm not sure we can get enough public buy-in to go...  then there are the resource constraints...  then there is the collusion level among all world powers (there isn't actually a dispute)...  [as can be seen from the Snowden incident, despite said other powers attempting to save face].

That's not to say that it can't happen, just that induction is academically lazy. 

LawsofPhysics's picture

War is a mess, period, be it by proxy or otherwise.  The bottom line is that the world has far too many liabilities relative to the available resources, and that which cannot be sustained, won't be.  

Kirk2NCC1701's picture

It also has WAY too many people making a claim (or trying to) to all these finite resources.

It's a zero sum game, and we should expect a super-massive correction to the global pop. Especially now that tech and machines can do so much for the lifestyle of the rich & powerful.

More than one if these types have told me that "A pop of around 2B can maintain its great lifestyle for centuries. The rest of the current pop is just wrecking the planet" was the expression used.

p.s. The Elite have NO intention of depopulation via nukes, as they don't plan to shit in their own nest. Rather, it will be via GMO viruses (viral cold wars) and sterilization via GMO food. Note that cheap food for the masses is mostly GMO.

LawsofPhysics's picture

p.s. define a GMO plant.  I farm almost 30,000 acres.  Many are heirloom plants, but we catalog mutations all the time.  Tell me, if a mutation occurs that make some plants more drought- or pest- tolerant and I decide to propagate/breed those progeny, are they GMO plants?

This has been going on for hundreds of years by the way.  Stop over thinking things, you will either eat, or you won't as that which cannot be sustained, won't be, period.

Kirk2NCC1701's picture

Fair enough.  I use the term 'GMO' in the sense of modifying the genes in a hi-tech lab -- for a specific trait.  E.g. making a plant resistant to high doses of pesticide. Some biologists and geneticists are concerned about the long-term effects of these 'foods' on the human genome and its fidelity to reproduce w/o scary (Frankenstein) effects or w/o causing sterility.  Notwithstanding the host of other concerns associated with pesticides, fungicides, etc, on the ecosystem (frogs, bees)...).

As I recall, and I'd have to search for it, there was an article I read some months ago, where lab mice became sterile in the 3rd generation of consuming certain GMO soys.  That troubled me, as we drink soy milk, instead of cow milk.

Your last sentence rings true, as we find ourselves eating a mix of both "standard" as well as "organic" produce & meat.  We do avoid farmed fish though.  Like most people, our budget does not allow the 'luxury' of only high-end organic food.

MicroSecession's picture

Agreed 100%.  Look at the foods that we are having massive allergic outbreaks to - either used in vaccines or GMO.

Also, most people are under the mistaken impression that mutations that occur in the wild are accidental, and therefore anything we introduce is therefore fine since it happens randomly in the wild anyway.  But in reality, the mutation process is fairly controlled.  There are many genes that are literally marked by the genome where they can be mutated, and, in many cases, *how* they should be mutated.

When we just inject these crops with new genes, we are going around their internal mechanisms, and the long-term effects biologically and ecologically simply aren't known.

MeelionDollerBogus's picture

GMO:

in defiance of evolution, multiple species' genomes are merged into a single organism using a viral insertion vector.

The proteins transcribed from those DNA snippets may be unhealthy (e.g. Bt toxin) and the viral vector IS unhealthy (ruins your immune system since it is poorly understood and its purpose is to get itself IN at any cost).

In the last several hundred years this has never, ever happened.

MeelionDollerBogus's picture

Incorrect.

All viral weapons attack all parties no matter what - the wind & water are not isolated systems.

In fact the elites would much rather 10 billion or more, so long as they live short lives & can't spread their shit & pollution very far because they don't have things like cars, only bikes, and don't have cities, only shanty-towns just outside the factories they serve in for the duration of their life-spans.

MeelionDollerBogus's picture

Induction requires recursion. It wasn't used here. Fractals use induction. When properly applied it has incredible ability to form the right equations matching the shape of an object, region or many interacting rates of change.

Again, it wasn't even used here.

Seer's picture

"silver will have more relevance because of the great use in manufacturing"

Ask them if they've ever heard of the phrase "Can't push on a string," or, if they're aware that the number of people on food stamps in the US is at an all-time high.  I suppose it would be too much to ask them to look over their shoulders at what's happening in China...

My brother runs around with the "professional" crowd.  As a sideline he'd sell commercial real estate.  All the inside information was available, of course.  After stating that I was going to hold off buying property until prices came down I was told by my brother that housing prices won't go down.  He bought property in Arizona back around bubble-pop time (not sure if it was before or after) so that he could play golf in his retirement.  And I waited and then bought property (Ag land) more cheaply and am going to try and farm until I drop dead...  Any one of these kinds of folks show up begging for food I will just inform them that there IS NO food shortage, that all is well and that they can run along...

LawsofPhysics's picture

+1, yes, fuck em.  Just be sure you have a dependable tribe to defend your property.

Kirk2NCC1701's picture

The correlation that I'd like to see, is how much you could have made by listening to ZH since its inception, versus listening to the mainstream investment advice, I.e. buying into the stock market. I honestly don't know what that correlation is, but would like to.

The proof is in the results/ pudding.

Anyone? Charles? Tyler?

SafelyGraze's picture

the dollar is not correlated with gold or with anything else

over the past 100 years as the number of dollars has increased, the price of gold and other assets has gone up and down

the reason is that, just like dollars, gold and other assets continue to be created at exponentially increasing rates

this is because there is an endless supply of gold and other assets

assets like dollars

which is what makes the dollar so strong

the more you create, the more valuable each one becomes

it's just basic economics

alien-IQ's picture

"the more you create, the more valuable each one becomes"

 

uh....????????......//////......????????.......what???????????????

 

LawsofPhysics's picture

"the more you create, the more valuable each one becomes" - completely ass backwards moron.

Go ahead, flood the market with anything and just watch what happens to price (it will crash).

that  is basic eCONomics.

Agstacker's picture

 there is an endless supply of gold and other assets

 

What are you smoking?

alangreedspank's picture

I think this was sarcasm guys...

TPTB_r_TBTF's picture

 

 

There are innumerable amounts of Gold and Minerals(oil is a mineral)

under the ice of Greenland and Antartica. 

And all we have to do to get to them

is to find way to speed up global warming.

MeelionDollerBogus's picture

w t f.

Oil is not a mineral.

Minerals can be around or immersed in liquid hydrocarbons but minerals are ROCKS. Crystals. Salts.

The ignorance is astounding.

hootowl's picture

Question for any genius that sees it:

Would I be better served by purchasing one, 1 oz. gold coin per year,....or purchasing sixty -two, 1 oz. U.S. Mint silver eagles per year?.....at current prices.

TPTB_r_TBTF's picture

well i sure ainT no genius,

 

but if you reveal to me the gold/silver ratio for any given date in the future,

i can probably answer your question.

MeelionDollerBogus's picture

That's what this is for.

http://flic.kr/p/f17z1s

and this http://flic.kr/p/f5bHkJ (entire bull market gold vs silver scatterplot)

FreedomGuy's picture

I am guessing you made a typo on that last sentence.

The supply of both can increase which in theory would keep the value somewhat constant. However, gold and dollars have many sources of demand and can move independantly.

My bottom line is that if you look, gold was $35/oz in 1971. Today it has "crashed" down to $1200. Which one has actually gained value over time?

Second, if you found a Civil War shipwreck and it had both currency and gold in the hold, which would you want to have today?

I rest my case.

Seer's picture

I'll add this for you (others seem to have not taken it as being implied):

</sarc>

BigJim's picture

I think you might want to put a </sarc> tag on that one

Pladizow's picture

"Conclusion: there is no correlation between gold and the U.S. dollar index"

On the 5 year chart, but what about longer time periods?

Spider's picture

People have to remember that the USD index is basically Euro, Yen, and Pound.  If the dollar strengthen it strengthens against THOSE currencies - but gold can strengthen against all the currencies

akak's picture

People also need to rememeber that fundamentally, the US Dollar Index is an outdated and woefully flawed metric of ANYTHING, much less of the actual and absolute value (purchasing power) of the US dollar.  Comparing one constantly and continually depreciating fiat currency against a small basket of several other equally continually depreciating fiat currencies is a fool's errand at best, and yet more insidious pro-fiat, pro-status-quo propaganda at worst.

Seer's picture

Best-looking horse at the glue factory...  Contexts.  Fundamentals.  Premises...

Colonel Klink's picture

Did we switch subject to John Kerry?

moonstears's picture

I think I read that some oft quoted asshole once said "in the 'longer time periods' we're all dead."/sarc

Silveramada's picture

...You simply cannot correlate fake money with real money

 

http://zysites.com/silververitas/

look at the daily moves/premiums/inventories in the pm's wholesalers world

jerry_theking_lawler's picture

wrong. correlation is not causation.

 

you are using your $FRNs to buy gold because your $FRN are worthless. thats not correlation, that is causation.

papaclop's picture

It is also fun to use JP Morgan's 0%cash access checks to buy gold and silver. They can be repaid using Uncle Ben's funny money.

SheepDog-One's picture

Must Buy.....moar.....goalds.....

KnightTakesKing's picture

What's the statistical (R-squared value) correlation between the two? Article did not mention this. Kinda weak analysis, ya think?

socalbeach's picture

Math is not Charles' strong suit.

Quaderratic Probing's picture

The relationship that matters is the numbers of gold buyers can only decrease as the value of the USD declines. People rioting because they cant afford food cant afford gold. If you have gold and your paycheck is worthless you will trade your gold for a turnip to feed your family even if the market says its worth $15000 per Oz.

The coming collapse in the Bond markets will crush the stock,CRB and housing markets the deflationary effect will push the USD sky high.

China learned banking from the Lehman school... stupid is as stupid does

Charles if you see this how about stock / bond relationship over this century. How often are both at record highs together? I bet only now.

LawsofPhysics's picture

"The coming collapse in the Bond markets will crush the stock,CRB and housing markets the deflationary effect will push the USD sky high." - 

You must be an optimist, because no society/currency has ever collapsed/died because their purchasing power was too strong.

Quaderratic Probing's picture

The end game of the high USD will be the ability to buy every money making asset on the planet at fire sale prices, congradulations America you win again.

Betting against America is a losers game, they are the House

LawsofPhysics's picture

Define "America", since you refer to USD/FRN I presume you meant to say "The Federal Reserve", since you refer to "buying assets at fire sale prices" with FRNs.

"Betting against The Fed is a losers game, they are the House"  - fixed.