Minor Gold Decoupling

Sunday, November 01, 2009

A 1% bounce in the dollar last week precipitated a 4% drop in the equity markets and a 1% fall in gold prices. The dollar's slow, controlled deterioration since the March 2009 high has shown a very tight inverse correlation to rising gold and equity prices. This week was no different as the relatively large jump in the dollar saw a sharp reaction from other assets priced in dollars.

While the short-term reversal in the dollar's trend has many calling for a bottom, I remain highly skeptical. I think the huge uptick in volume in the UUP is more a result of increased interest and not a long-term, bottoming sign. The dollar may continue higher in the short run on some short-covering from the weaker shorts but the long-term trend is down until further notice. I reiterate that the dollar is not "getting crushed", it is still above the levels it traded at for much of 2008, before October's panic. With unprecedented debt levels, ultra-low interest rates and massive increases in liquidity it is only logical that the dollar should be trading much lower relative to 2008.

The chart below shows a small divergence in the recent dollar strength, gold and equity market weakness correlation. Friday's close alerted me to the possibility of a minor decoupling of this trend. Gold markets rallied back into the equity market close almost going positive while the dollar remained flat and equity markets fell closing on the dead lows of the day. This strength in GLD is encouraging as it has successfully held the $100 level. I will be looking to add to my longs in GLD this week on the continued holding of $100.


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