Saturday, May 21, 2011

The Dollar And Gold: A 20-Year Perspective

Yesterday the WSJ told us that World Is Bitten by the Gold Bug.

Gold continued its upward march in a time of global financial tumult, closing above $1,500 an ounce Thursday for the first time as investors seek safe haven in the metal....

The reason for gold's ability to do well in any market lies in its recent role as a haven from concerns about the dollar, inflation and shocks in Europe, the Middle East and Japan.

Today the WSJ observes that the Dollar's Decline Speeds Up, With Risks for U.S.

The U.S. dollar's downward slide is accelerating as low interest rates, inflation concerns and the massive federal budget deficit undermine the currency.

With no relief in sight for the dollar on any of those fronts, the downward pressure on the dollar is widely expected to continue.

With these two WSJ articles as a context for the recent behavior of the Dollar and Gold, let's take a look at the highly inverse correlation between the two over the past twenty years.


Barry Ritholz, who occasionally warns of main-stream media contrarian indicators, commented yesterday on the WSJ gold article: "Front page stories are not great usually for investments — although this is the WSJ, not Time or Newsweek. It has much less of a contrarian indication."

I'm inclined to agree with Barry, and I have the same opinion of the Dollar article. A short-term reversal is certainly possible for either of these assets. But the looming battle over the U.S. budget, with a particular focus on the debt ceiling, underscore the potential for an even weaker Dollar and increased demand for Gold.

View the original article here

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