V.10:11 (464-466): Gold And The U.S. Dollar by John J. Murphy

Gold And The U.S. Dollar by John J. Murphy

Last month, intermarket analyst and veteran technician John Murphy explored the relationship between interest rates and the U.S. dollar. This month, he progresses to the interrelationship between the U.S. dollar and gold.

Last time, I showed that the U.S. dollar moves in the opposite direction of interest rate futures prices. At some point, however, the falling dollar will reawaken inflation pressures. One of the first hints of inflation — or disinflation — usually comes from the gold market, due to the strong historical link between the gold market and the dollar.

Historically, the gold market trends in the opposite direction of the dollar. The inflationary 1970s saw gold soar above $800 while the dollar fell. The dollar turned higher in 1980 and rallied before peaking in 1985 while, concurrently, gold peaked in 1980 and dropped all the way down to $300 during the same five years that the dollar rallied. February 1985 marked the last major turn in both markets. That month, the dollar fell from its highest point in the 1980s, while gold rebounded from its lowest price for that decade.

In Figure 1, the gold market is compared to German Deutschemark futures from that 1985 turning point. Utilizing a foreign currency has the same effect as comparing an inverted chart of the dollar to the gold market and makes visual comparison easier. If the dollar and gold trend in opposite directions, then the mark and gold should trend in the same direction. Figure 1 shows the remarkably close positive correlation between the mark and gold from 1983 to 1989. Both markets turned up in early 1985 as the dollar peaked, fell in late 1987 as the dollar rallied and then turned up together in 1989 as the dollar fell.