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Gold Usurps Dollar As Safe Haven for Worried Investors

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Wealth Cycles
Jan 27, 2011

During the past few years of global economic turmoil, the securities markets have been driven by fear. When fear drives the market, the result is unusual market behavior and decisions by investors that would normally not occur were fear not in the driver’s seat.

In 2010 stocks and the U.S. dollar showed a strong negative correlation—if stocks rose, the dollar fell, an indication that when spooked investors sold off stocks, they turned to the dollar for shelter from the storm.

Correlation is a statistical measurement of the way to securities move together. If the stock market and gold move up and down in lockstep, they would have a perfect correlation of 1. A correlation of 1 between two assets means they move in the same direction 100% of the time. A correlation of -1 means they move in the opposite direction and a correlation of zero implies no relationship.

Recently, however, the market has started to show signs it is returning to more usual market patterns. In recent weeks, stocks and the U.S. dollar have had little to no connection compared to the negative correlations they shared throughout 2010.

The chart below shows the correlation between the S&P500 and the U.S. Dollar trade-weighted index. The Dollar Index is measured in comparison to a basket of other major currencies—the euro, Canadadian dollar, Japanese yen, United Kingdom pound, Swiss franc, Australian dollar, and Swedish krona. As the chart depicts, in the past couple of years stocks and the USD have rarely moved in the same direction because of their negative correlation. Stocks were always falling when the dollar was rising or vice versa.

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During the past month, the correlation between the S&P 500 and USD has come extremely close to 0, meaning that there has been no relationship between the two.  This indicates that investors are no longer seeing the dollar as a safe haven. The chart below is a key indicator of the market starting to show more normal patterns.

  • A d v e r t i s e m e n t

The second chart depicts the correlation between Gold and the S&P500. Gold and stocks shared a very strong correlation for the second half of 2010—almost like twins: when one moved up, the other had to follow. Again, more recent patterns show that correlation has fallen off and has even gone negative and is starting to hover around 0.

The final chart below depicts the correlation of Gold to the USD, showing a very strong negative correlation. As the dollar goes down, gold skyrockets and vice versa. This chart and the second chart both tell us that the new safe haven is no longer the U.S. dollar—it is gold. Today, when investors perceive risk in the dollar, they invest in gold.

The recent signs that markets are returning to normal patterns don’t mean the roller-coaster ride is over yet.  It will take time and likely a lot more pain before the market is able to complete a true correction. The market will only truly return to a “normal” state when the U.S. Federal Reserve stops shooting it full of liquidity morphine—and there’s no indication that’s going to happen any time soon.

But as our final chart shows, gold is great portfolio insurance and a great investment for this era of a shaky  fiat currency system. Why hold excess dollars in this economy when you could be holding gold?

This article was posted: Thursday, January 27, 2011 at 4:36 am

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