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« Gold-Prices.biz Portfolio Update 26 May 2009 | Main | The Best Deals in Physical Gold »
Thursday
May212009

Correlation Street

USD in decline 21 May 09.JPG


It is fascinating to see just how the main players in todays investment puzzle are correlated to each other and how their movements are interlinked and influenced by the behaviour of the others.

We will kick off with the US Dollar the worlds reserve currency which is now in the mode of what appears to be a progressive and accelerating decline.

Taking a quick look at the above chart of the US Dollar we can see that the dollar is languishing below the 200dma and looks set to test the '80' level in a continuation of its current down trend. Just three months ago the dollar stood at 89, today it stands at 81, registering a fall of 9.8%. The Chinese, who have recently started to increase their exposure to gold must be extremely troubled by the losses they are racking up as holders of a currency that returns nothing in the way of interest and is now depreciating on a daily basis. The mainstream investment community is slowly moving out of dollars but appear to be placing their cash into the stock market which brings us to our first correlation, that of the Dollar and the DOW.

USD and DOW 21 May 09.JPG

Over the last 36 days the Dollar and the DJIA have been in lock step as dollar declined and the stock market rose in an inverse reaction to a declining dollar. As we see it this move is one of jumping out of the frying pan and into the fire. It makes sense to reduce exposure to the dollar and many other paper currencies for that matter, but to follow the herd and place your cash into a sector that consists of bankrupt banks, teetering house builders, defunct car makers, etc, makes no sense to us.

This behaviour does suggest to us that the investment of choice lies between the markets and cash and that the precious metals story remains largely undiscovered by the majority of investors. So we can only conclude that when this stock market rally peters out, investors will be faced with the choice of going back into dollars or seeking refuge elsewhere.

This brings us on to the next correlation which is that of the Dollar and Gold.

USD and gold chart 21 May 09.JPG

This chart shows that gold is now moving higher almost in unison as the dollar sinks. We expect the dollar to break 80 shortly and slide towards the 70 level within the next three to four months. This decline of another 10% or so will be reflected in the price of gold as another 10% increase in the price of gold will put it into new all time high territory. A new high will bring with it a little more media attention at a time when the herd are trying to make a decision between the market and cash or an alternative. Enter the precious metals sector complete with an immaculate CV to tempt them into a brighter future.

This will be golds third and last run at a $1000/oz, once a new high has been established gold will not trade below this level again.

To touch on a few more correlations we have gold and oil and here we can see that oil has made a fairly abrupt move from $50/bbl to $60/bbl. This move north by oil could be telling us that inflation lies in wait further down the track and gold usually responds to the oscillations in the oil price. Also note that the relationship between the precious metals of gold and silver and the gold bugs index , the HUI, which has come to life recently and has started to restore some of the leverage to the gold prices that has been the norm historically but absent until recently as depicted on the chart below.

HUI and Gold Chart 21 May 09.JPG

Just one word of warning, previously, when the RSI for the USD has dipped below 30, this has signalled a short-intermediate term bottom in the greenback, and it has been followed up by sharp reversal rallies and this could be the case again, so we are watching the RSI just in case the Dollar becomes severely oversold or the mining shares become severely overbought.

USD and RSI 21 May 09.JPG

Conventional wisdom suggests having 5% or so of your portfolio in precious metals with some commentators upping this figure to around the 15% mark. We however are far more cavalier in our approach to investment and only invest in the precious metals sector such is our enthusiasm for it. Hold on to your core position and enjoy what you are about to be served.

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Reader Comments (2)

About 50% of my 401K is invested in gold and silver stock, and it's exciting to see the HUI and XAU going up, but these are still stocks! If the stock market crashes again, won't these stocks also go down with the tide?

May 22, 2009 | Unregistered CommenterMark

Mark,

We have thought about this and we don't know the answer for certain. Sooner or later we believe that gold and silver and the PM stocks will disconnect from the major market influences and go there own way. But we don't know when this will happen, the PM stocks could well be the baby in the bath water during the next market sell off. However we would expect that they would also be the fastest to recover.

August 3, 2009 | Unregistered CommenterGold Prices

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