A long known correlation is that between gold and the dollar. Since the end of the dollar peg to gold, this price movement has been pretty consistent. The current move of these two assets has again highlighted the negative correlation, as well as an explanation of the times.
The dollar’s future price movement was in question due to speculation over what the Fed was likely to unveil as stimulation to the stagnant economy. As conditions worsened, the dollar became even more devalued in anticipation of QE3. At the same time, gold saw a spike to record levels as both a safe haven and a currency hedge.
The market reacted to Operation Twist by rallying in the dollar (NYSEARCA:UUP). The new form of stimulation aims to reinvest previously matured debt into longer dated securities in the hopes of pushing down long term yields. This has, in effect, worked to drive up demand for long dated debt as shown in the TLT (20+ yr. Treasury bond fund) chart. Similarly, the stronger dollar has pushed gold down off of its exponential rally that has persisted much of this year.
Gold continues to remain in an uptrend and as long as the Euro crisis doesn’t solve itself any time soon, the correlation between gold and the dollar may weaken from its current -1 status. This means that the dollar may continue to strengthen due mainly to a weaker Euro, and gold may resume its uptrend, only this time as a safe haven and not as much of a dollar currency hedge.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.