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Will A Rising US Dollar Hurt Gold? The Negative Correlation Theory Debunked.

|Includes:SPDR Gold Trust ETF (GLD)

There's a commonly held belief that the price of gold moves inversely to the US dollar. While this may be true at times, one must look at the big picture before accepting this as an absolute truth.

I feel it's important at this time to review this issue. The US dollar appears to be setting up for at least a short-term rally and some technical analysts are proclaiming that this will cause gold to fall again.

I agree that the dollar is likely to bounce soon. As the chart below shows, since peaking above 84 in early July, the dollar has recently slid below 80 and is quite extended below its 50-day moving average. As can be expected, sentiment on the dollar has also dropped significantly over this period. These and other reasons make the dollar a likely candidate for a bounce in the near future.Click to enlarge

Now let's look at the historical correlation between the price of gold and the dollar. The best article I could find on this issue was written by Charles Hugh Smith.

As Smith points out, the assumed perfect negative correlation between gold and the dollar isn't remotely visible in the charts. There are several instances when the dollar and gold rose in tandem, completely debunking the correlation theory. One would also expect a peak for one to align with a trough for the other and this isn't always the case either.

Smith does a much better job illustrating this fact in the charts in his article, but the 3-year charts below for the dollar and the gold fund (NYSEARCA:GLD) indicate that there is far from a definite, consistent negative correlation.

Gold and dollar correlation debunked

The myth of the negative correlation between USD and goldClick to enlarge

After the outright slaughter gold experienced into its April and June lows, I believe the damage has already been done. Whether the US dollar begins a short-term rally or not, I think it's unlikely that gold will set a new low this year.

While gold may indeed sink to $1,000 per ounce again (as many experts are expecting), I think its far more likely to rally to a new all-time high above $2,000 before doing so. This bipolar behavior of an extreme in one direction leading to an extreme in the opposite direction is what we've experienced in several assets over the past few years and appears to be the new normal.

While the above forecast for gold is speculation, what is certain is that gold and the dollar are not linked as closely as most people have assumed to be the case.

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Disclosure: I am long GDX, GDXJ, GLDX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Stocks: GLD