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US Dollar Weakness Favors Gold Strength

US Dollar Weakness Favors Gold Strength

2012-10-16 16:15:00
David Rodriguez, Head of Product
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Article summary: A strongly negative link between the Dow Jones FXCM Dollar Index and Gold prices suggests that further USD weakness could coincide with gold price strength.

Correlation between US Dollar and Price of Gold

forex_gold_us_dollar_correlation_forecast_body_Picture_1.png, US Dollar Weakness Favors Gold Strength

Dow Jones FXCM Dollar Index (lhs)

Inverse of the Spot Price of Gold (rhs)

Correlation between the US Dollar and the Price of Gold

The correlation between the US Dollar and gold prices currently trades near records, and we expect that any further Dollar declines would produce continued rallies in gold prices. The Dow Jones FXCM Dollar Index has fallen by as much as 5.5 percent from May highs, while spot gold prices have strengthened by 17.6 percent through the same stretch.

A USDOLLAR failure at key resistance leaves further downside in store, while potential reward versus risk on a Gold long position looks attractive given its recent pullback.

Low forex market volatility likewise gives us a fairly bearish US Dollar trading bias, and the potential for Greenback weakness favors Gold price strength.

Forex Correlations SummaryView forex correlations to the S&P 500, S&P Volatility Index (VIX), Crude Oil Futures prices, US 2-Year Treasury Yields, and Spot Gold prices.

S&P 500

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.50

0.36

0.82

0.11

-0.22

0.49

-0.31

1 Month

0.56

0.44

0.11

0.31

-0.54

0.29

-0.48

3 Month

0.54

0.59

0.19

0.62

-0.72

0.63

-0.56

1 Year

0.62

0.59

0.02

0.81

-0.84

0.75

-0.69

Gold

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.62

0.65

0.19

0.50

0.09

-0.46

-0.87

1 Month

0.42

0.48

-0.08

0.45

-0.51

0.37

-0.55

3 Month

0.60

0.55

-0.29

0.56

-0.56

0.59

-0.69

1 Year

0.52

0.39

-0.26

0.51

-0.37

0.51

-0.57

Crude Oil

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

-0.51

-0.44

-0.23

0.06

-0.29

0.02

0.48

1 Month

0.26

0.49

-0.07

0.47

-0.52

0.50

-0.51

3 Month

0.42

0.53

0.02

0.52

-0.55

0.49

-0.51

1 Year

0.43

0.43

0.07

0.55

-0.54

0.50

-0.48

US 2yr Yield

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.09

0.14

-0.35

0.69

-0.15

-0.15

-0.51

1 Month

0.36

0.23

-0.18

0.06

-0.38

-0.13

-0.29

3 Month

0.13

0.04

0.53

0.02

-0.15

-0.07

0.08

1 Year

0.22

0.12

0.20

0.14

-0.30

0.09

-0.12

VIX

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

-0.53

-0.41

-0.59

-0.45

0.33

-0.51

0.57

1 Month

-0.54

-0.58

-0.09

-0.37

0.54

-0.32

0.55

3 Month

-0.46

-0.50

-0.03

-0.53

0.56

-0.60

0.52

1 Year

-0.54

-0.50

-0.03

-0.66

0.66

-0.63

0.58

Perfect Positive Correlation:

1.00

Perfect Negative Correlation:

-1.00

--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com

Receive future correlation studies and other reports via this author’s e-mail distribution list with this link.

Meet the DailyFX team in Las Vegas at the annual FXCM Traders Expo, November 2-4, 2012 at the Rio All Suite Hotel & Casino. For additional information regarding the schedule, workshops and accommodations, visit the FXCM Trading Expo website.

Contact David and follow via Facebook and Twitter:http://www.facebook.com/DRodriguezFXhttps://twitter.com/DRodriguezFX

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