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Murphy''s ''Midas'' commentary for Oct. 29 posted in the clear at GoldSeek
By the numbers: Gold's link to dollar
By Mark Hulbert
CBS.MarketWatch.com
Friday, October 29, 2004
http://cbs.marketwatch.com/news/story.asp?
dist=¶m=archive&siteid=mktw&guid=%7BCE85CA8F%2D0DE2%2D4034%2D864B%
2D21725DC3AA60%7D
ANNANDALE, Va. -- On Thursday, gold bullion rose as
the U.S. dollar fell against foreign currencies.
This pattern has been repeated so many times in recent
months that investors have not only grown to expect it
but also to assume that the two always move in opposite
directions.
But they haven't always.
In fact, there have been many years in which gold and the
U.S. dollar have not had any apparent relationship. So
what we're witnessing right now is unusual enough to
warrant special attention.
Just how unique is gold's current relationship to the U.S.
dollar's value on foreign exchanges? Consider the
correlation coefficient between the daily percentage
changes in gold bullion's price and in the U.S. dollar
index (a composite of the dollar's value against the
currencies of the United States' major trading partners).
The correlation coefficient can never fall below -1 on the
low end or rise above +1 on the high end. If this theoretical
maximum were seen in this case, it would mean that gold
and the dollar move in perfect lockstep with each other,
moving up and down in tandem.
The negative extreme, in contrast, would mean that the two
move inversely to each other, with one going up whenever
the other declines, and vice versa. A zero correlation
coefficient would mean that there is no detectible
relationship between the two.
Take a look at the chart below, which shows the correlation
coefficient between gold and the dollar in each of the calendar
years beginning with 2000.
[CHART AVAILABLE AT LINK ABOVE]
While all the coefficients were negative, as expected, notice
that the value for 2004 is markedly larger than in any of the
four previous years.
Indeed, in 2000, there was hardly any correlation between
the daily fluctuations in gold and the dollar.
What significance does all this have for the gold investor?
It means that whether gold appears to be in a bull market
depends in large part on the currency in which its price is
denominated. When expressed in dollars, gold appears to
be in a bull market.
However, a different conclusion emerges when gold is
viewed from the perspective of at least some other
currencies.
The dollar's strongly inverse relationship to gold therefore
leads me to ask a related question: Is what we've seen in
recent months better described as a bull market in gold or
a bear market in the U.S. dollar?
I'll leave it to you to decide.
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