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Friday, July 2, 2010

The Euro / Gold Relationship

One of the strangest developments of 2010 has been the strong positive correlation between gold and the dollar.

Typically, when the dollar falls - gold rises, and vice-versa. However, year to date, the correlation coefficient between gold and the dollar is +0.82 (a strong positive relationship).

The same does not hold true for the Euro, which has declined sharply this year amid sovereign debt concerns. The correlation coefficient year to date between gold and the Euro is -0.84 (a strong negative relationship).

When all three are overlaid on a chart, it is easy to see that the Euro and Gold / Dollars have zigged and zagged opposite each other all year.

Presumably, as fear ratcheted higher due to default concerns in countries like Greece - investors fled the Euro and piled into dollars and gold as a safeguard.

However - lately, and rather quietly, the European sovereign debt worries seems to be abating. Credit stress indicators like the TED spread have put in a clear top and Greek bond yields have also started dropping.

Not surprisingly, the Euro has also begun to strengthen and has broken above the 50 day moving average.

This is clearly a bad sign for gold, which recently had a sharp sell-off.

Anecdotally, trades don't get much more crowded than the gold trade or much less crowded than the Euro trade - and given this mounting evidence I am very enthusiastic about shorting gold at this time.


  1. the dollar index will run into it's supporting uptrend line soon, aren't you worried about a bounce off of that? that would weaken the euro relative and gold would follow right?

  2. Hi Robbie,

    The dollar has just broken sharply below the 50 day moving average. I think this is a much bigger factor than the trend-line support (which I don't think is much of a factor at all).



  3. so if you could, would you prefer a short GOLD/EUR rather than GOLD/USD? if not, why? this would seem to magnify your reward.

    hope you had a good 4th btw

  4. Hi Robbie,

    I had a great fourth and I hope you did too.

    Short gold / Long Euros would most likely magnify my gains - but not much since the daily movement of Euros is pretty small.

    In this instance, I am actually long GLL (UltraShort Gold ETF) which doubles the daily movements of gold. Much more bang for my buck, so to speak :)