Top trader: Can the dollar and gold stocks rally together?
From Jeff Clark, Editor, Delta Report:
Most people think those two assets tend to move in opposite directions. And I’ve received a few comments from readers suggesting I’m trying to have it both ways – that I’m presenting both cases so I’m sure to be correct on one. Then I can brag about being right on one while I quietly ignore the other.
So, please let me clear up the situation…
Gold and the US dollar do tend to have an inverse relationship. Put the charts side by side and you can see clearly that, over the long term, when the dollar rallies, gold falls. And vice versa.
There’s no surprise there. Any economic textbook will tell you that’s what’s supposed to happen.
But the textbooks don’t say anything about what happens to gold stocks as the dollar moves up and down. There is no strong inverse correlation between the two. In fact, gold stocks and the dollar often move up and down together.
Take a look at the long-term, monthly charts of the VanEck Vectors Gold Miners Fund (GDX) and the US Dollar Index ($USD)…
The dollar enjoyed a very strong rally from November 2014 to January 2015. GDX rallied almost 30% during that period.
The dollar then spent most of 2015 chopping back and forth, while gold stocks got crushed.
In early 2016, gold stocks and the dollar did indeed move in opposite directions. But they moved up together again in the summer before decoupling in the later part of the year.
And, in perhaps the best illustration that there’s no inverse correlation between gold stocks and the dollar, just look at the decline in the dollar index so far this year. Meanwhile, GDX has simply been chopping back and forth.
In a year in which the US dollar dropped almost 10% – which is a HUGE move for a currency – GDX is only up 3%, which is a ridiculously small amount for the volatile gold sector.
There’s no correlation here, inverse or otherwise. That suggests gold stocks will fall just because the dollar looks poised to rally. The action in one does not seem to influence the action in the other to any regular degree.
Remember, stocks typically move based on expectations. They move “ahead of the game.” So, it’s entirely possible the recent weakness in the gold sector is happening in anticipation of a rally in the dollar. By the time the rally occurs, gold stocks will have already discounted the event. Then they’ll be looking “ahead” to the next dollar decline.
That’s why it’s entirely possible for both the dollar and the gold stocks to rally together.
That’s also why I humbly expect to be right on both calls.
Best regards and good trading,
Crux note: Mining expert Louis James just created a new presentation on why a certain type of gold stock is set to soar as much as 500% in the coming rally. Get the full story here.