Now Rising in Tandem, Are Gold and the Dollar Forging a New Link?

Gold and the dollarFor years, a clearly see-saw correlation existed between gold and the U.S. dollar: When the dollar dropped in value, the price of gold rose. It made a certain kind of sense because investors fleeing the risks of paper money tend to plunk some of their capital in precious metals.

Conversely, when expectations of a growing economy, low inflation and rising corporate profits take hold, the dollar assets look attractive compared to gold, which doesn't earn any dividend.

But a funny thing happened to that see-saw correlation this year: Gold and the dollar have both risen, as we can see by glancing at a chart of the UUP exchange-traded fund (ETF), a proxy for the U.S. dollar, and GLD, an ETF proxy for gold.

The correlation held in 2009, as gold rose and the dollar declined, and also in January 2010 as the dollar gained and gold slumped.

But in February, the correlation dissolved: Both the dollar and gold rose in tandem. It's as if a snarling dog and hissing cat suddenly became best friends.

I recently discussed the case for gold continuing higher. And way back in August of 2009, I set out why the U.S. dollar, despite its pariah status at that point, could turn around.

As we can see on this chart of the dollar, the buck did a 180-degree turn in November, and has been on a tear since, reaping a hefty 18% in a mere six months for investors who ignored the forecasts that the dollar was doomed.

It was a classic contrarian call. When everybody seems to be on one side of a trade, the situation is ripe for a reversal. And investors who dumped dollars for euros in late 2009 have suffered a horrendous 23% loss.

Setting aside the question as to why gold and the U.S. dollar are now gaining ground together rather than playing see-saw, let's see if there's any technical evidence to support the notion that the dollar has more room to run.

Without any fancy analysis, we can see that when the 50-day moving average (MA) line turns upward, the dollar is primed for a multimonth rise.

Just as technically positive, the 50-day MA is positioned to rise through the 200-day moving average, establishing what's known as a "bullish cross."

Further Gains Ahead?

Overhead resistance is strong at the previous high around 90, and as a result, traders with a technical-analysis orientation will anticipate a pause in the buck's advance or even a retrace. But the strong upward trendlines portend further gains ahead.

Has the traditional correlation of gold and the dollar run its course, or is it simply taking a brief hiatus? Of course, no one knows the future, but the charts suggest that both gold and the dollar are now in long-term uptrends. Whether these trends are related or entirely independent of each other is ripe for speculation, but market participants must be open to the notion that the gold-dollar see-saw is no longer a reliable correlation.
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