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Dollar Decline and Gold Rise... Business as Usual

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For sure, the US' current situation is different than any other point in the past 35 years... but that's always the case.

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The following article appeared on the Buzz & Banter at 2:50 pm and is being republished for the benefit of the Minyanville community...


As Mr. Practical pointed out earlier, since the Fed's cut, the US Dollar is down and Gold is up. Is this a sign of trouble, or just business as usual?

I'm obviously in the minority on this one, but I think it's the latter. The reason is simple history, looking at what has happened after prior Fed cuts. For sure, the US' current situation is different than any other point in the past 35 years... but that's always the case, and it doesn't stop history from proving to be as good a guide as any when looking forward.

In the short-term after prior rate cuts, there was a fairly consistent pattern of stocks rising, the Dollar falling (at least to a greater extent than it rises) and Gold rallying. The longer out we look, though, the more those last two begin to change.

By three months later, the average max gain in the Dollar averaged +3.4% compared to an average max drawdown of -1.4%. With Gold, the avg max gain was +6.1% compared to an avg drawdown of -6.9%.

Looking out a year, it became even more pronounced. The reward/risk on the Dollar was tilted 3 to 1 to the long side compared to a miserable 0.6 on Gold.

So if looking at the current cut in terms of history, and looking out a year in the future, based on prior precedents I'd take the Dollar as a long over Gold. That's a contrary opinion if ever there was one, and I'm sure I'll hear a chorus of "sold to you!" based on it.

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