Profit Opportunities Long Before the Crowd Catches On…
Sentiment analysis allows you to see beyond the “conventional wisdom” that blinds most investors, helping you find profit opportunities long before the crowd catches on…
Today I’m going to show you one such case in point — the price of gold and its relationship to the U.S. dollar.
Both gold and the U.S. dollar are historically viewed as safe-haven baskets. But interestingly, the conventional wisdom is that the two always move in opposite directions.
And while it’s true their movements are often negatively correlated, there are times when that impression gets turned on its head.
The chart below shows an overlay of the Dollar Index (DXY) against spot gold.
Notice that at the hard right edge of the present moment, there is a wide spread. This spread is the result of the U.S. dollar going up and gold coming down. But that spread is narrowing.
That narrowing is interesting and actionable.
I researched the correlation statistics on the DXY and gold. Last July they were negatively correlated -88%. Yesterday, it reached a negative correlation of -71%. If we view 100% negative correlation as the highest level possible, we see that current levels leave a lot of room for being surprised when gold and the U.S. dollar don’t move as anticipated.
Looking further back on the correlation between DXY and gold, we can see even more dramatic shifts.
Between September and December, the traditional negative correlations between gold and the U.S. Dollar Index went from zero correlation to a 16% positively correlated. That reversal was triggered by the European debt crisis bubbling up again. The correlation only lasted until January, leading to the -71% correlation we see now.
So what does the narrowing correlation mean to us?
If the negative correlation gets weaker, say to 70% or below, you should stop investing on the mindset that the dollar and gold always move in opposite directions. However, if the negative correlations increase, buying dollars and selling gold will be the more effective strategy.
We’ll need to watch the dominant sentiments affecting gold in the weeks ahead. There are the expectations of yet another Federal Reserve stimulus plan — QE3 — in the United States. Gold could also bounce up if fears about Europe’s debt crisis abate.
The bottom line is that gold and the U.S. Dollar Index are at a turning point in their correlations, and that means it’s going to get more interesting!
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