Gold has been on a tear lately. Indeed, gold was the only commodity that did not break its long term trendline during the massive commodities correction starting summer of 2008
Many have not yet noticed, but recent strength in gold comes at a time of increasing strength in the dollar as well. Correlation between gold and the dollar has been near perfect since January 26, and more correlated than normal for quite some time.
The above two charts show a very strong positive correlation between the US$ index and the price of gold. A near perfect inverse correlation to gold can be seen by looking at a chart of the Euro vs. the US$.
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Many claim that gold is rising because of inflation. That argument, repeated daily, simply does not stand up under any scrutiny.
Gold fell from $850 to $250 over 20 years yet there was inflation, every step of the way.
A more convincing theory, backed up in practice is that gold does well in times of severe credit dislocations. In 1971, Nixon Closed The Gold Window making the dollar inconvertible to gold and imposed wage and price controls. Commodity prices and interest rates soared for a decade. This was a credit event.
The stock market panic in 1929, culminating in Roosevelt illegally confiscating gold during the Great Depression and devaluing the US dollar, was another credit event that strengthened the price of gold.
A third credit event is happening right in front of our eyes. This credit event is the insolvency of the world's banking system, a deflationary event as detailed in Humpty Dumpty On Inflation.
The important point now is that it is not just the US banks that
are insolvent, but banks in the UK, and EU as well.
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Europe's TOXIC DEBT
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