Gold price waffles as two key indicators diverge

James Cullen

Earlier in the summer, DailyFinance noted that a weakening dollar was the main contributor to rising energy prices, as the underlying supply/demand fundamentals were poor. However, the dollar's impact extends far beyond energy, and its fall has coincided with a rally in the broader market. The combination of these two factors has sent the CBOE Volatility Index ($VIX), a gauge of investor fear, to lows not seen since pre-Lehman times. Taken together, the actions of the dollar and the VIX send conflicting signals about the future of another hot commodity investment: gold.

The Powershares U.S. Dollar Index Bullish (UUP) is down more than 12 percent since March, testing its 52-week low. Gold is typically bought as a hedge against a falling dollar, and the rapid expansion of the monetary base by the Federal Reserve has led many to anticipate that gold would soar to new highs. Instead, gold has settled into its tightest three month trading range since September 2007. One possible reason for this is that, even as the dollar loses value compared to other currencies, the fear that has filled the marketplace has also dissipated. If the historical relationship holds, one of these indicators is wrong, and that could spell big profits for investors who correctly identify which one.

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