Correlations
The market just keeps on going on, you could think that it could go on even further. I would not be particularity surprised to see S&P 500 at 1200. We have equities rallying and at the same time declining US dollar and gold hitting nominally highest level ever.
Chart 1. Gold Futures
US dollar weakens is a straightforward cause of gold strength. Seems that investors have put aside specific commodity fundamentals and only theme in recent weeks is US dollar decline. Equities are discounting V shaped recovery and pretty strong one. I wonder if the US economy is, judging by the equities, recovering strong, why would US dollar be losing value against currencies and economies which had the same cure as the US in the form of monetary expansion and government stimulus. Also, weak dollar means less export income for everyone that exports to the US. Beside protectionism emerging in last days, I tend to think that many central banks and governments would not sit idle watching the US currency losing value. Prospects of run to debase its currencies against the dollar and each other would again be strong bullish sign for the precious metals complex.
Chart 2. DXY Index
As I see logical reasons for the gold to be strongly negatively correlated to the US dollar, I tent to think that high negative (0.9+) correlation in between US dollar and crude oil is in the both cases off economy recovering or not will weaken and crude oil price discovery would returning to the old model of demand and supply.
Chart 3. Correlation – Gold Futures vs. DXY Index
Chart 4. Correlation – Crude Oil Futures vs. DXY Index
And last but not least I think that crude oil and S&P 500 correlations makes no sense as effects of oil high or low oil price translates to less and more profitable companies and not vice versa.
Chart 3. Correlation – Crude Oil vs. S&P 500
