The Dollar and Commodities Trend in Opposite Directions

This chapter demonstrates the inverse correlation between the U.S. dollar and commodity prices, one of the most consistent and reliable intermarket relationships. The chapter also shows the close positive link between commodities and foreign currencies. The Correlation Coefficient helps measure the strength of a relationship between two markets and offers a way to see when that relationship is weakening. Gold doesn’t always act like other commodities because of its additional role as an alternate currency. Gold isn’t just the world’s strongest commodity. It’s also the world’s strongest currency. The chapter ends with a description of the dollar’s impact on other intermarket trends.

Both Markets Need to Be Analyzed Together

One of the most reliable intermarket relationships is the inverse relationship between the U.S. dollar and commodity prices. Throughout the inflationary decade of the 1970s, for example, a falling dollar contributed to soaring commodity prices. A dollar bottom during 1980 contributed to a major peak in commodity prices that led to two decades of falling prices and disinflation. Bond and stock prices rose during those two decades while commodities fell out of favor. In the 20 years between 1970 and 1990, every important turn in commodity prices was either preceded by, or coincided with, a turn in the U.S. dollar in the opposite direction. During the bear market years of 1990 and 1994, a falling ...

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