If Inflation, What Correlations Break?

If there is a secular shift into inflation, many correlations that held over the prior decades and prior years will end. Some will simply become uncorrelated, some may reverse. Here's an interesting one: teh DXY rising with interest rates. What nation can afford to take interest rates highest? USA, EU, Japan or UK?

Turning Japanese or Not?

The 10-year / 2-year Treasury yield ratio. The lower horizontal was last breached (cleanly) in June 2014. The start of the U.S. dollar bull market.

Here is the ratio vs UDN, an inverse DXY ETF.

Long-term the trend is towards a higher and higher peak for the ratio, a system hitting greater extremes in each crisis. The ratio will go infinite if the 2-year gets down to zero. The chart is mapping the rising waves of financial crisis hitting the U.S. economy. I don't know if the currency relationship will hold because there's only one record and that bull market was "on schedule" according to my read of the USD cycle. According to the cycle, DXY should be 1.5 years into a 5 to 6 year bear market.

Silver and Inverse Dollar

Which way?

Gold Bottoming In Most Currencies

Here is a chart of GLD versus PowerShares DB U.S. Dollar Index Bearish Fund (UDN). This shows the price of gold relative to the foreign currency basket that is the U.S. Dollar Index (Euro 57.6%; Japanese Yen 13.6%; British Pound 11.9%; Canadian$ 9.1%; Swedish Krona 4.2%; Swiss Franc 3.6%). Notice that the 50-day moving average is still above the 150-day.

Here is GLD alone. The 50-day moving average has cross the 150-day moving average, but the bounce is more pronounced due to recent USD weakness relative to the euro and yen.

Here is GLD against CEW, an emerging market currency basket.

Finally, GLD versus the Australian dollar (FXA), which has been very weak since May. Notice that gold has actually flat-lined since May in the Australian dollar. Good news for Aussie miners?

Gold also appears to be topping versus the miners. Here is GDXJ, which formed a head-and-shoulders pattern in the 14-day RSI. This isn't necessarily bullish for miners, only that they will outperform the next move in gold, up or down.

Since I expect a U.S. dollar rally, the gold price may be under pressure moving forward, but I expect it will not breakdown again in currencies such as the Australian dollar.

Gold and the markets

Has gold hit a new high around the world? Not yet, it's still below the peak set in June against the basked of foreign currencies in the U.S. dollar index.

How about the stock market rally these past few weeks?

How much have grains rallied versus gold this year?

As for the gold miners...gold has just started moving higher in New York trading and it's helping Market Vectors Gold Miners (GDX) advance. The fund is within about 20 cents of an all-time high, previously reached in March 2008, when gold crossed $1,000 for first time. Gold is up almost 30% now since then, but GDX is flat. Some bubble...

Gold is still cheap

See this chart comparing gold to the inverse of the U.S. Dollar Index, a chart of gold versus a basket of foreign currency.

Your gold buys a lot more today than it did almost 5 months ago, when gold hit its peak in U.S. dollars. If you view the world through golden eyes, it is doing very well as an investment. However, in U.S. dollars (or renminbi, for that matter) it is not so expensive.

I view the euro and U.S. dollar as two ends of a see-saw. The value of each goes up and down, up and down, but within their range, they're staying in place relative to the Earth. Meanwhile, each time the see-saw swings, gold ratchets up another notch, moving farther away from the ground. U.S. dollars are climbing now as the euro falls, so much that in the eyes of a U.S. dollar holder, gold appears to have dropped. But from gold's position, it is absolutely farther from the ground.

Dollar Up, Gold down...

Gold has moved lower as the dollar moved higher, but the move has not been 1 to 1. Here again is the ratio of SPDR Gold Shares (GLD) to PowerShares DB U.S. Dollar Bearish Fund (UDN). The rising ratio indicates that foreign currency is losing versus the dollar more than gold is losing versus the dollar. That losing currency is, of course, the euro.

Gold is moving lower after market close thanks to IMF gold sales.

Gold versus S&P 500, Euro, Dollar Index

Gold has fallen about as much as the U.S. dollar strengthened, as the ratio of SPDR Gold Shares to PowerShares DB U.S. Dollar Bearish (UDN)has been consistent. GLD is up slightly versus CurrencyShares Euro (FXE). The first chart has the SPY versus GLD. In terms of gold, U.S. stocks have pretty much gone nowhere since April.

S&P 500 versus dollar index, euro and gold

Another view of the rally

Here's the SPDR S&P 500 Index (SPY) divided by PowerShares DB U.S. Dollar Bearish (UDN)

Here's the SPY divided by CurrencyShares Australian Dollar (FXA)

Here's the SPY divided WisdomTree Emerging Market Currency (CEW). Much shorter time-frame because CEW issued in the spring.

Here's the SPY divided by SPDR Gold Shares (GLD). Notice the weak trendline.