Chart Showing How Relationship Between Gold and Greenback Changed

We know that the relationship between gold and the dollar has changed.  It used to be that gold moved opposite (inverse) to the U.S. dollar; now they tend to track each other. What changed?

A recent report in Bloomberg says that the dollar’s inverse relationship with gold reversed as the global recession deepened, increasing the appeal of the metal as a refuge and stoking bets central banks outside the U.S. will cut interest rates to near zero.  A quote from the story:

“Gold has historically been seen as a hedge for dollar weakness,” said Lee Hardman, a currency strategist at the Bank of Tokyo-Mitsubishi Ltd. in London. “As other banks look like they will follow the Fed into quantitative easing, it’s eroding confidence in other currencies. This makes the dollar the most attractive currency and gold a store of value across the board.”

Now, look at this chart illustrating that change in relationship …

You can see how the price of gold per ounce and the trade-weighted index for the dollar during the past year. The weekly correlation between their returns for the five years
before the Federal Reserve cut borrowing costs to near zero on Dec. 16 was negative 0.56. The relationship turned positive with a daily correlation of 0.45 during the past month.

IN OTHER NEWS …

The  Case-Shiller Home price index fell 18.5% index in December. Professor Robert Shiller recently made a statement on housing.  The key points …

• House prices are still only halfway back down to fair value.  
• Prices don’t usually stop at fair value.
• Obama’s plan won’t turn house prices around.

Below is a Robert Shiller chart that makes this crystal clear from the New York Times article by James Quinn).

Yesterday, I passed along a view that many European banks are too big too nationalize.  William Isaacs, a former head of the FDIC, says the same thing about U.S. banks.  Speaking as someone who’s “done this before”, he says that nationalization wouldn’t work for us and that the Swedish model is a joke. His argument boils down to the biggest banks controlling some 2/3 of the nation’s banking assets.

I’m sure the heads of the various big U.S. banks agree with this view — they just want us to keep bailing them out — that is “pour money down a black hole.”  I think Mr. Isaacs is blinded by his closeness to America’s biggest investment bankers — and I hold the same view of Treasury Secretary Tim Geithner.

Meanwhile, Pimco’s Gross Says U.S. Needs Credit Creation, Not Bank Nationalizations .  There’s another guy who constantly talks his book.  Since he brings up the subject, I believe Mr. Gross REALLY wants the corporate welfare gravy train for banks to continue … trillions and trillions more dollars at taxpayers’ expense.

The end is nigh — Americans spend less on booze.  Here’s a chart …

Source:  Bloomberg

Of course, this means less revenue for the Federal and state governments.

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