by niea Fri Oct 09, 2009 12:03 pm
I don't think gold & dollar relationship is fixed but it is most of time correct in opposite side
Taken frm:
http://www.articlesbase.com/investing-articles/the-gold-us-dollar-relationship-787436.html#
The post made on Feb 2009
What will happen to the US Dollar, Gold and other Precious Metals as countries around the world enter recessions? What are the basic trading rules that investors should know if they are spread betting on these markets? 1) Gold is considered to be a long-term hedge against inflation. That has been empirically justified by research conducted by the World Gold Council (June 2006). 2) In the short-run, the geopolitical tensions or periods of uncertainty spark an uptrend in the price of precious metals. Precious metals may be considered to be a hedge against geopolitical tensions or severe crises. 3) There is an inverse relationship between the Commodity Precious Metal Price Index and the US Dollar Index. This relationship is also substantiated by the empirical findings of the World Gold Council which shows that there is a negative relationship between the price of gold and the US dollar. 4) During recessions the US dollar typically appreciates in value and the price of silver, platinum and palladium decline, keeping true to the inverse relationship mentioned above. 5) During recessionary periods the price of gold and the US dollar appreciate together, failing the inverse relationship in the short-run. In the long-term, the inverse trend between gold and the US dollar holds, just not during recessions. The above suggests that gold is not only a long-term hedge against inflation and a short-term hedge against crises. It suggests that Gold, unlike silver, platinum and palladium, is also short-term recessionary hedge. If the above is true, that goes some way to explaining what could happen over the next few years. For a slightly different perspective Anthony Grech, Analyst, IG Index stated in his 2008 Precious Metals Report that he felt that: 1) Uncertainty concerning a US recession and weakening equity markets could entice investors back to precious metals, triggering brief spikes. 2) My overall impression is bearish for 2008-2009. I believe that precious metals have already reached their peak and silver, platinum and palladium are likely to experience a downward correction from current levels, especially if the US economy enters a recession and the US dollar starts to appreciate. 3) On the other hand, gold finds some support during recessions and appreciates. However, the rise is likely to be minimal since the increase during the previous three economic downturns averaged around 2%. As a result, investors would be better off shorting other precious metals. 4) Assuming the US economy did fall into a severe recession similar to the stagflationary period seen in the 1980s, gold (and possibly the rest of the precious metals sector) could start to experience a sharp rebound. However, I believe that this event is unlikely to occur. The Federal Reserve is proactively reducing interest rates and has been successful at managing the recessions that occurred after the 1980 downturn. 5) [my] long-term trend for precious metals is bearish, but short-term ‘emotional’ spikes are foreseeable. Spread betting carries a high level of risk and may not be suitable for all classes of investor. Only trade with money that you can afford to lose. Make sure you fully understand the risks involved. If necessary, seek independent financial advice.
another source taken frm:
http://www.gold-eagle.com/editorials_05/milhouse021307.html
Anyone who follows the gold and currency markets closely will realise that the US$ gold price and the Dollar Index generally trend in opposite directions; or, to put it another way, that the US$ gold price and the Swiss Franc generally trend in the same direction. This reciprocal relationship between gold and the dollar is often not evident on a daily or weekly basis, but is almost always evident during periods of 12 months or longer.
The reason that gold and the dollar generally trend in opposite directions is that in one respect gold is just another currency. It is no longer money in the true meaning of the word, but it tends to trade as if it were. As a result, when the dollar weakens on the foreign exchange market over an extended period then the US$ gold price will generally rise during the same period; and when the dollar strengthens over many months the US$ gold price will usually fall. There are, of course, leads and lags and there's no reason to expect that percentage changes in one will be accompanied by equal-and-opposite percentage changes in the other, but when charts of the dollar and gold are compared it quickly becomes apparent that the two have been inversely correlated since the floating -- some would say sinking -- currency system came into being in the early 1970s.
In discussing the dollar-gold relationship in the above paragraphs we used the words "generally", "usually" and "tend" because over the decades there have been a few periods when gold and the dollar have NOT trended in opposite directions. One such period occurred between May and November of 2005, prompting many gold bulls to proclaim that gold had de-coupled from the dollar. However, this proved to be just a 6-month aberration within a 10-year period during which the traditional relationship was very strong.
Another period during which the traditional inverse relationship broke down was May through to December of 1993. The most pronounced divergence of all from the traditional gold-dollar relationship occurred during 1978-1980 and is clearly evident on the following chart comparison of the US$ gold price and the Swiss Franc (the SF/US$ exchange rate). The chart shows that the best gold rally of the past 100 years -- a rally that took the gold price from $200/oz to $800/oz in the space of just 14 months -- occurred while the US$ traded sideways relative to the Swiss Franc. In this case, gold was not driven upward by weakness in the US$ relative to other paper currencies, but, instead, by fears that the world's monetary system was coming apart at the seams. There was a mass exodus from all paper currencies and one of the main beneficiaries was the substance that had invariably been chosen by the market to perform the role of money during those historical periods when it had been free to choose
We suspect that gold's best gains during the current secular bull market will ultimately come in response to the same sorts of fears that led to the dramatic 1978-1980 price surge. In any case, the point we really wanted to make is that gold never actually de-couples from the currency market because the investment demand for gold -- the only thing that really matters as far as gold's intermediate- and long-term price trends are concerned -- is inexorably linked to what's happening to the official currencies. Most of the time gold responds to trends in the dollar's foreign exchange value, but there are also times when it responds to changes in the general level of confidence in paper money regardless of whether the US$ happens to be a relatively weak or a relatively strong currency.
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