Intermarket analysis is a powerful tool that gives traders/investors a macro predictive direction of stocks, bonds, commodities and currencies. Intermarket analysis states that all asset classes are interrelated and that you can’t definitively determine the direction of one asset class without examining the other asset classes.
There are several key relationships that bind these four markets together. These relationships include:
- The INVERSE relationship between commodities and bonds.
- The INVERSE relationship between bonds and stocks.
- The POSITIVE relationship between stocks and commodities.
- The INVERSE relationship between the US Dollar and commodities.
A rising Dollar puts downward pressure on commodity prices because many commodities are priced in Dollars, such as oil. Bonds benefit from a decline in commodity prices because this reduces inflationary pressures. Stocks can also benefit from a decline in commodity prices because this reduces the costs for raw materials.
Gold is sort of a commodity. It’s a hard asset and mined like any other metal. However, it behaves more like a monetary asset, especially against the US dollar. As a rule, when the price of the US dollar goes up, the price of gold goes down and vice versa. However, while gold typically has an inverse relationship to the dollar, it’s not always the case.
The past year has been somewhat surreal in the gold market, as we have the rare occurrence of the dollar rising in somewhat slow fashion while gold bullion has appreciated about $300 per ounce to trade near $1,500. Historically, a rising dollar and rising gold bullion haven’t gone together, but the distortions that have come with global quantitative easing policies are to blame for the breakdown in this inverse relationship.
Moreover, if the Fed is cutting the fed funds rate and the European Central Bank is accelerating QE due to the bad economic numbers from the Old Continent, the dollar will not decline, as the interest-rate differentials are still in favor of the greenback.
Still, the excess reserves in the global financial system, which are a function of QE policies by the ECB, Bank of Japan, Bank of England and the Fed, are what has given gold enthusiasts the hope that we will make fresh all-time highs in gold bullion
So this US Dollar and Gold correlation may last a bit longer as both have more room to the upside before hitting monthly supply zones, which means they could fall together as well once they both reach the monthly supply zones.
This post is my personal opinion. I’m not a financial advisor, this isn't financial advise. Do your own research before making investment decisions.