hello, the article (a college grade, I forget which one) which says that typically “when the dollar moves up, the gold falls and vice versa.”
it says that “nowadays, the inverse relationship between the greenback and gold still remains although the dynamics have somewhat changed”
it says “the reverse happens when there are signs of growth”
the reverse of what? the inverse I take it? so this seems that when there is econoimic growth (as determined by the dollar), then gold will go up.
this can’t be. it would mean that gold goes up when the economy is good (the reverse that is mentioned) , and gold goes up when the economy is bad (when the inverse applies).
further, the accompanying chart seems to show that gold just follows the dollr (they both go down at the same time)
can anybody clarify?
thanks
I think you’ve kind of answered your own question - it’s a waste of time thinking about it!
The price of gold has gone up as the stock markets have risen due to the Fed’s QE programs which are designed to pump the stock market by providing primary dealers with essentially risk-free money to invest in the markets. These money printing programs have had the effect of gutting the dollar throughout most of the 2nd half of 2010 and as gold is priced in dollars a lower dollar means that you have to spend more dollars to get the same amount of gold as you did before i.e. price of gold goes up. Other commodities have experienced a similar effect- wheat, sugar, coffee, etc.
Also, many investors are concerned about the effect the Fed’s massive printing press is going to have on future inflation and have been buying gold as a result to hedge themselves against this. Large buyers’ speculation has also had an effect on the upward march of gold so sometimes when USD has been rising in 2010 gold has also been rising too as the demand for gold has been so strong it overcame the usual inverse correlation. However, in general, a strong dollar is bad for commodity prices - especially when combined with an improved economic outlook. Just look at the latest upswing in USD Index from early Jan and the sharp drop-off in the price of Gold.
So to explain the gold / USD correlation and how it can change over time you need to look at a number of other factors and how they interact with each other. If the US economy was to significantly improve, unemployment drop properly, USD strengthen and inflation remain under control the price of gold would most likely be decimated.
appreciate the response, but this still does not get to what I am asking.
the graph shown shows TEN YEARS of a correlation. In and of itself that seems to be a long time for an exception to a rule to hold.
But further, my original contention that there is a clear contradiction when it says “the reverse happens when there are signs of growth”
now, there are BASICALLY two scenarios for the most part.
either there is growth or there is not growth.
this statement would be implying that gold is ALWAYS GOING UP.
because if in general, there is a reverse correlation that would mean.
scenario 1. when the dollar goes down, gold goes up (inverse correlation)
scenario 2. when the dollar goes up, gold goes up (the exception noted)
perhaps the writer meant to say the reverse CAN happen.
i dont know… its all pretty muddled. I think the writers write things that seem sophisticated on the surface, but whose logic falls apart upon close inspection. I am not expecting perfection, just something that would pass a logic course.
I appreciate the responses I get. I dont mean to be critical here, whoever is writing these is doing a poor job. this is one of many inconsistent, confusing articles in the school portion. sorry, just being honest.
Sincerely
John
The school says the following:
"Because of the dollar’s safe haven appeal, whenever there is economic trouble in the U.S. or across the globe, investors more often than not run back to the Greenback.
The reverse happens when there are signs of growth."
So when the economy is bad this means that people pile their money into USD as they view it as a safe haven. USD strengthens considerably and gold weakens as a result (all other things being equal).
The reverse that the article refers to is when the economy recovers and grows. This means that investors use their USD to buy riskier assets around the world. USD weakens as a result of all the selling and the price of gold strengthens given that it now takes more dollars to get the same amount of gold (again all other things being equal).
If you overlay a Gold and Dow chart (as a proxy of economic performance) together you’ll see how gold goes up as the Dow goes up and vice versa though with lags between the turns. After the financial crisis begins in 2008 the Dow heads down, USD strengthens and gold weakens. Then as the Fed begins to pump the stock markets via QE the Dow goes up. Gold heads up too as investors who had returned their money to USD now began to invest it all over the world and USD weakened. USD also weakened due a variety of other factors which amplified the effect on the price of gold. The correlation isn’t perfect though between Gold and USD for the reasons I outlined in my previous post.
I don’t have access to 10 year data here in work so can’t comment on the whole chart as I don’t see it attached in your post but the basic premise of the article is correct though simplified for new readers.