Home > commodities, market analysis > Short term uptrend in Gold broken, Correlation to USD & more

Short term uptrend in Gold broken, Correlation to USD & more

The 1-year uptrend channel (blue lines) is violated… The recent new (nominal) high did not make a new high in RSI or MACD…(negative divergence for the technically inclined & the dotted red lines on the chart) means the recent high was made on declining momentum – not a good sign.

I have drawn out the various support levels from here down and my short term (< 1 year) bias is to the downside especially for August… Demand is slow during the summer months because most jewelery manufacturers are shut down and don’t reopen till September…

Gold chart with technical analysis

Source:stockcharts.com

US Dollar & Gold Correlation

In theory, a commodity priced in USD dollars will move inversely to the value of USD e.g.- if Gold goes up in USD, then the value of USD in other currencies goes down and vice versa. Among all commodities, Gold particularly exhibits a strong negative correlation in a “normal” volatility year… during highly volatile or uncertain economic periods, this correlation deviates significantly from the norm…

Lately Gold & USD have been moving in lock-step… i.e. positively correlated as illustrated in this nice chart from Bespoke Investment Group

Chart showing correlation of Gold & USD

Source: Bespoke Investment Group

Eventually the correlation has to revert to its mean… which would mean that USD & Gold move in opposite directions. Couple weeks ago I posted a chart of the US Dollar Index positing that USD will reverse the downtrend and rally… hasn’t happened yet but I still think the USD is at a key support level and will rally from here and expect Gold to continue the downtrend…

Also, Gold has risen 21% from 1044 in Feb 2010 to its intraday high of 1265 in June 2010 without a 10% correction… of course it can go higher without correcting but the subsequent correction will be just as severe…

Lastly… Inflation

Historically, Gold is also meant to be a hedge against inflation… if you have been reading the news lately, you know well that prices are declining not rising so I believe the argument of buying Gold right now as a hedge against inflation is bogus!

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Update: Gold during Deflation via ZeroHedge

According to Casey Reseach

There’s lots of data about what gold does during periods of high inflation, but less so with deflation, partly because we don’t see a true deflation all that often. But of course we’ve got the biggie we can look at, and the seriousness of the Great Depression can give us a big clue as to how gold stocks behave in a true deflationary environment

This chart from the above post is quite interesting:

Source: zerohedge.com

From 1929 until January 1933, the stock of Homestake Mining, the largest gold producer in the U.S., rose 474%. Dome Mines, the largest Canadian producer, advanced 558%. In spite of the gold price being fixed at the time, gold stocks rose dramatically.

At the same time, the DJIA lost 73% of its value

The bottom line is that the two largest gold producers – during a time of soup lines and falling standards of living – handed investors five and six times their money in four years.

What about gold itself? On April 5, 1933, President Roosevelt issued an executive order forcing delivery (i.e., confiscation) of gold owned by private citizens to the government in exchange for compensation at the fixed price of $20.67/oz (you can read the original order here). And less than nine months later, he raised the gold price to $35, effectively diluting every dollar 41% overnight and swindling everyone who had turned in his gold.We don’t know exactly what an untethered gold price would have done during the depression, but given its distinction in history as a store of value, we believe it would retain its purchasing power in a deflationary setting regardless of its nominal price. In other words, while the price of gold might not rise, or could even fall, your best protection is still gold.

 

 This is the only quasi-convincing article I have seen on owning Gold in deflation. A lot of well-respected economists (David Rosenberg, Roubini, etc) and financial bloggers (Mish) are urging investors to own gold during deflation but without an objective reasoning… Perhaps that is as noted above due to the lack of true deflation in a fiat monetary system.

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  1. July 31, 2010 at 7:39 PM

    In the long run tins of canned beans with molasses are an “inflation hedge” too, and probably a better one than gold 50% of the time. 😉

    • August 2, 2010 at 10:09 PM

      Agro’s and farmas are always good hedges. Although historically gold has always been better hedge.

  2. August 2, 2010 at 10:12 PM

    Sorry, I forgot what I wanted to say. Have you ever tried to get a moving window correlation? That should give you the real short term picture.

    • August 2, 2010 at 10:16 PM

      no, I haven’t… usually, I find plenty of bits & pieces for my posts/analysis… my goal is to try to put them together…

      thanks for the great suggestion 🙂

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