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Gold's Correlation

According to the Business Dictionary, correlation means: "the degree and type of relationship between any two or more quantities (variables) in which they vary together over a period." In a positive correlation, the variables will move on the same direction; in a negative correlation, the variables move in opposite directions.

The Federal Reserve continues to create $85 billion dollars every month, which has driven the balance sheet to almost $3 trillion dollars. As shown in the chart below, there is an almost perfect correlation between the rise of gold and the United States balance sheet from more than 10 years ago.

(click to enlarge)Click to enlarge

On July's Federal Reserve meeting, the Fed has stated that the economy is growing only modestly and will keep buying $85 billion dollars a month. If the correlation mentioned above continues, the gold price should move accordingly to the increment in the Fed's balance sheet.

It is our view that in order to achieve a truly diversification in an investment portfolio, low correlated assets should be included in order to maintain a diversified level of risk for investors. Please refer to chart below regarding gold's correlation to other assets.

(click to enlarge)Click to enlarge