Gold and dollar are showing unusual correlation

By Evaldo Albuquerque


Gold made new highs this week following the announcement of Europe’s loan package. That tells me that the market has no confidence that the plan will fix the structural deficit problems in the region.

Since inflation is not really on the horizon at this moment, rising price of gold reflects the lack of confidence in fiat currencies.

Another important fact that caught my attention is that gold and the dollar are showing their strongest correlation in 14 months, moving against a traditional inverse relationship. Investors are seeking refuge from financial turmoil in Europe by buying dollars and gold, which are both considered safe-haven.

In the long-term however, if the U.S. government doesn’t address the ballooning government deficit, it’s highly unlikely that the dollar will continue to move with gold. The correlation between gold and dollar will be important to indentify the next phase of the financial crisis: a dollar crisis.

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