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Gold and the Greenback: A Perfect Inverse Relationship

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If the US dollar goes up, the metal commodity goes down.

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Almost everything I read about gold in the media suggests that it's going higher. Many suggest that it will even double or triple in price. Some of the fundamental reasons given are inflation, government debt, the seasonal cycle, supply constraints, its proliferation as a currency substitute, and the fact that countries are increasing their holdings.

Looking at the monthly chart of gold, the inverse argument that I made for the dollar (see, Debunking the Dollar's Demise) can be made for gold. After a 10-year run and strong upward trend, the increased volume in 2008 and 2009 is more indicative of a topping process than the start of a doubling or tripling process. (There is much more to this inverse volume and trend relationship that I'll get to in a minute.) Following the correction after the price high and peak volume in 2008, volume decreased on the recovery trek higher, and was even higher on down months. However, this changed with the breakout to a new high, which was accompanied by higher volume. The question is whether or not this breakout will follow through.

Looking at the 12-period RSI (preferred for monthly charts), it's clear that the underlying enthusiasm for gold doesn't live up to the hype. Also notice that except for the extreme readings in 2006 and 2008, the most common peak reading for the RSI in gold is around the 70-75 level. This is true back to1980, which is the last time there was an extreme RSI reading above the 70-75 level. I cover this type of RSI analysis in more detail in Using the Relative Strength Index to Your Advantage.


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The inverse volume and trend relationship between the dollar and gold is much more than just that. The relationship between the dollar and gold is an almost perfect inverse relationship, which is clear on this chart since 1999. The relationship can be traced back to at least the end of the post-war period (WWII), however.


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But it's not just gold. Despite all of the particular reasons cited for buying gold, it's really just another commodity. And, it's clear on this next chart that while gold has shown much greater relative strength since the end of 2008, in the big picture, all commodities rise and fall together.


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Putting all of the evidence together that I've collected so far, a clearer picture emerges. In Debunking the Dollar's Demise, I pointed out how technical analysis paints a picture that suggests that the US dollar is probably not going to fall of a cliff, and even looks poised for a rise. In this article, I showed you that some studies of gold, but not all, suggest that it's losing its luster. More importantly, I pointed out the very important inverse relationship between all commodities (including gold) and the US dollar. Because of this longstanding inverse relationship, if the US dollar goes up, then there's a very high probability that all commodities, including gold, will go down.


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