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The Correlation Between Gold and the Dollar Becomes Weirder and Weirder

A positive correlation between gold and the dollar has happened before, for short periods of time, but I don’t recall any time when it has lasted this long.

Source: iStockphoto, claffra

You could call gold “the anti-dollar,” as it is the purest form of hard money. This is why when gold bullion and the U.S. dollar both rally at the same time it becomes somewhat surreal, but this has been happening in fits and starts over the past 18 months or so, ever since mid-2018.

A positive correlation between gold and the dollar has happened before, for short periods of time, but I don’t recall any time when it has lasted this long. I think it will continue, for the following reasons:

The monetary tightening that the Fed was undertaking in 2018 was going to pressure the dollar higher and pressure gold lower. While it did pressure the dollar higher, it did not pressure gold lower after the middle of that year. I think the reason is that, even as the Fed was trying to normalize U.S. monetary policy, other world central banks were going full speed ahead with their own form of monetary madness. As a result, net global quantitative easing (QE) was still rising, pushing gold up, even as the Fed was trying to tighten.

Ultimately, the Fed failed at normalizing monetary policy, and its balance sheet is now growing again. Last week, the 10-year Treasury yield closed below the fed funds rate at 1.47%. So why is the dollar rising if the Fed is no longer tightening but loosening monetary policy via QE with a growing balance sheet? Because other central banks have QE operations that are more aggressive, relative to the size of their economies, and because U.S. interest rates are higher, and U.S. economic performance is better.

Covid-19 – as the novel Wuhan coronavirus is now called – is affecting economic performance in Asia. It is not possible to fight a virus with monetary policy as there is a “hard stop” of economic activity under quarantine – although if those quarantines are successful, monetary policy afterward will surely help.

The problem is that although China’s quarantines are beginning to bear fruit, the menace appears to have spread rapidly outside of China. Although it now looks more contagious but less deadly than SARS, I think the U.S. bond market is telling us that it will have an impact on first- and second-quarter GDP, both in the U.S. and globally, with China being disproportionately affected the most – for the time being.

In other words, we have not yet seen the peak of the Covid-19 menace.

If Silver a Better Deal Than Gold?

Back to the bullion market: Is silver better than gold? That was a question I got from a client last week.

My answer is: “Neither is better than the other.” Silver is not the same as gold – in the same way that platinum is very different from palladium. Those are four very different precious metals. Of the four, only gold is primarily used as a monetary metal, while the other three are primarily industrial metals.

The fact that gold bullion may be just $250 per ounce away from a fresh all-time high, while silver is far away from an all-time high, may or may not mean anything. Because silver is a smaller market, it tends to overheat when gold is hot and it tends to badly underperform when gold bullion is under pressure. For all intents and purposes, “poor man’s gold” (as silver is sometimes called) is a “high-beta” precious metal.

While there is clearly a positive correlation between silver and gold bullion, the swings in silver bullion can become nauseating, and it may stay depressed for a long time, so if anyone wonders whether to buy one or the other, you might as well split your money between both, with the above-mentioned caveats.

Be that as it may, I don’t like coins, which give dealers the ability to take advantage of buyers via much wider bid-ask spreads than with bars or mini-bars. If you are buying for trading purposes, there are plenty of gold and silver futures and ETFs. If you prefer a buy-and-hold investment, then mini-bars are the best choice, if you have access to secure storage. There are also physical bullion ETFs that offer storage as part of the ETF expense ratio and offer convertibility into the metal if you own a large number of shares, although the convertible amount of shares is cost-prohibitive for most individual investors.

All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.


Equities Contributor: Ivan Martchev

Source: Equities News

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