US Dollar Index, Gold And The S&P 500

Several days ago, in “Managing Portfolios Today With Three Indicators“, the first indicator in the list of three indicators impacting today’s market listed was $US. You’ve heard the talking heads say this and you read other blogsters write about this but have you seen the relationship presented graphically. I haven’t so I thought I’d research it and bring the results to you.

The charts below are the value of the S&P 500 Index (^SPX) and the price of the gold ETF (GLD) in both cases compared against the US Dollar Index (.DCX) which measures the performance of the Dollar against a basket of currencies: EUR (Euro), JPY (Yen), GBP (Pound), CAD (Canadian), CHF (Swiss)and SEK (Swedish).

Each panel contains trading over the past three trading sessions for the S&P; you should note that currencies trade 24-hours/day so you’ll see gaps between the Dollar Index on one day and it’s value at the opening of the US market’s the next day. The Dollar Index is the blue line; the S&P Index and GLD are the multi-collar (or tan) lines.

S&P Index vs. US Dollar (click on chart to enlarge): Sure enough, there is a pretty distinct inverse correlation these between the value of the dollar and the US market (most clearly seen in last Thursday trading).

Monday, the market had a terrific first hour and a half of trading as the Dollar Index was declining. But at around noon, the Dollar Index starting rising and the market starting falling. It continued until 2:10 when both reversed direction. Is the tail (dollar) wagging the dog (market) or the other way around? I’m sure the reasons are complex and convoluted but there’s no mistaking the fact that as the dollar’s value drops, US stocks become more valuable because of the large percentage of profits made overseas, because its less expensive for foreigners to buy stock in US companies …. all the above reasons and more.

Gold vs. US Dollar Index (click on chart to enlarge): Underlying worldwide supply/demand factors (industry and jewelry usage, sovereign demand) impact the price of gold and gold is also traded around the clock so the relationship between Gold and the US Dollar Index, although inversely correlated, is less direct.Each time the US Dollar index increased, the price of GLD (in $US) went down and vice versa.

Granted, three days offer only a peak and more data over longer periods are needed for sound economic or academic conclusions. But when I looked at the same data others have been looking at, I clearly see the relationships.

Editorial Comment: I feel somewhat unpatriotic but, for the sake of exports, our stock market seeing higher earnings, improved ability to pay our debts to foreign holders (in cheaper dollars), and improved export opportunities I’m rooting for a weaker $US.

The biggest risk will be in the importation of inflation through higher worldwide commodity prices (expressed in the lower valued $US Dollars) and higher cost of all the cheap goods we’ve come to expect flooding our retail stores. It may be a simplistic, short-term perspective but a weaker Dollar may actually help rejuvenate our industrial sector by reducing our reliance on imports.

What do you think?

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