Gold usually has an inverse relationship with the dollar. When the USD goes up, gold goes down, because theoretically a stronger dollar can buy more gold. Additionally, commodities in general tend to fall on a stronger dollar because it is often correlated with lower expectations for growth.
This week we saw a major correction in equities with banks leading the way. American International Group, Inc. (NYSE: AIG) was down more than 20% on Tuesday alone. This is a fear-driven decline, and we can see evidence of that in a positive correlation between gold and the dollar.
When gold prices are correlated, or go the same direction as the dollar, we get concerned about trader expectations for the near term. Rising gold prices are often caused by traders using the metal as a store of value or a way to hedge against uncertainty and inflation.
The rally in gold prices this week is still relatively small and I don't expect gold prices to hit new highs unless it breaks resistance at $1,000 per ounce. What is really notable is the fact that gold and the dollar are trending together, which tends to be a bad sign for the near term.
There are ways to invest in gold without having to actually buy the physical commodity from a dealer or have a futures trading account. For example, the SPDR Gold Trust (NYSE: GLD) is an ETF that owns gold bullion and then sells shares in the fund like a stock.
John Jagerson is a co-founder of Learning Markets.
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