Over the last six weeks, gold and the US dollar have been moving higher in strong correlation. This is contrary to the typical moderately inverse relationship between the two Tier 1 bank assets.
Gold & The Dollar
I use the term “moderately” because the media and mainstream market analysts talk about the relationship as if it’s a tick-for-tick strong inverse relationship. Over a long period of time, the correlation between the dollar and gold is around -30% (the statistical study I’m referencing was conducted by a Trinity College (Dublin) professor and the LBMA – it examined the data from 1975 to February 2012).
Over very short periods, the inverse relationship might be considerably stronger.
Gold Vs The Dollar
However, since late 2005, gold and the dollar have occasionally traded higher with a strong correlation for a short period. In those instances, that particular trading relationship often precedes a sell-off in the dollar while gold continues to move higher.
The chart above shows gold vs the US dollar for the last 52 weeks. The two assets have been moving higher with a very strong positive correlation. There’s been a positive correlation between gold and the dollar as both have been trending higher since the beginning of 2024.
Gold’s Divergence
Also note that after the periods in which gold and the dollar moved higher together, at some point the dollar headed south while gold continued higher. Gold continued higher to a new all-time high in all three instances (March 2008, September 2011 and July 2020). If this trading pattern holds this time, it implies that there will be an all-time high price for gold that is considerably higher than the current level at some point after the dollar diverges negatively and heads south.
The chart above shows the dollar vs gold from 2004 to present, weekly. Annotations show the periods when gold and the dollar moved higher in correlation.
The best explanation in my opinion for this trading occurrence between gold and the dollar is that financial turmoil is unfolding in the financial system around the period when the two assets move higher in tandem.
Enter Inflation
In 2005, inflation began accelerating along with the price of oil, the mortgage finance bubble was inflating rapidly, interest rates were rising and the real (inflation-adjusted) GDP was falling.
2008 saw the culmination of the mortgage crisis which ushered in a full-fledged banking crisis. 2020 needs no explanation. Currently, it is starting to appear as if the entire debt-driven financial system globally is at risk of collapsing.
Thus, I believe the best explanation for the dollar and gold moving higher together is a flight to safety into gold and the dollar by those who can “see” what’s unfolding. At some point, the financial turmoil triggers a sell-off in the dollar and an even bigger movement of capital into gold and silver.
The financial system could be approaching the tipping point which will trigger a sharp sell-off in the dollar and an even bigger move higher in the precious metals sector.
Dave Kranzler is a hedge fund manager, precious metals analyst and author. After years of trading expertise build-up on Wall Street, Dave now co-manages a Denver-based, precious metals and mining stock investment fund.
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