Debunking Wrongly-Held Beliefs About The Dollar, Oil & Gold

There's this commonly-held belief that the dollar and oil/gold ALWAYS head in opposite directions. Overall, that's true,

but today I want to dispel some myths.

Yes, it is generally true that the dollar and commodities move in the opposite direction. As the dollar loses its purchasing power, the cost of goods rises over time. And in times when the dollar rises (which isn't often...and I'll explain more about that later), commodities like gasoline, oil and gold, etc. become cheaper overall.

But you have to realize that these inverse correlations happen OVER TIME and not necessarily on a tick by tick or day by day basis.

In the chart below, you'll see that when the dollar trends lower, oil heads higher overall (emphasized by the colored lines).

HOWEVER, this doesn't mean that just because there's an OVERALL inverse correlation that they respond near-term in an inverse correlation always. This is what baffles people. I'll get notes like, "Why isn't oil up today since the dollar was down?" or vice versa.

Well, the chart below PROVES that there are windows of time (that can for sure last for many months) where the currency and the commodity head in the same general direction. (See the yellow boxed areas to see the times when the greenback and "Texas tea" head in the SAME direction).

The same goes for gold...

OVER TIME, the dollar and gold head in opposing directions. In fact, the inverse correlation between the dollar and gold is much higher than even that of the dollar and oil. HOWEVER, just because this long-term inverse correlation is high doesn't mean that on a daily or weekly basis, they have to trade inversely from one another. But yes, in general...when the dollar goes one direction, gold heads the other direction. The chart below shows that.

But you'll notice that there are times (and sometimes those can last for many months) where they head higher or lower together. There are even some pros that believe that this cannot happen. I've had to prove it to some of them on the charts. But it DOES happen. So if it can happen over some months...the dollar and gold can certainly head in the same direction on a moment-by-moment/intra-day, daily, weekly, etc. basis. The chart below shows a couple of examples of this. (By the way, you'll notice this is more common for oil than for gold, where the dollar and the commodity trade in the same direction for a long while).

Therefore, don't be mystified when, here and there, the dollar and gold/oil trade in the SAME direction for a period of hours, days, weeks or yes, even months. It can and does happen. But overall...over long periods of time, you'll find it to be true that they do, in fact, trade inversely to one another.

The direction of the dollar is one of the biggest influences on these commodities. And just know that, over time, the Federal Reserve wants inflation to go up (and thus the dollar to go down, even though they don't advertise that part of it). How do we know? We know that the Federal Reserve wants inflation to grow at close to 2% each year but not more than that. Why?

If you think your dollar would strengthen (and thus prices of goods/services fall), you'd be apt to delay your purchases. But if you feel that things will get more expensive over time (inflation), then you'l be quicker to spend your dollars sooner rather than later. Why does the Fed want this? It's because the economy is about 70% driven by consumer spending. So if consumers, overall, were to greatly delay their purchases, it would be like cutting off the fuel to the economy.

The downside is that it makes the person who's strictly a wage earner and consumer work much harder over time. HOWEVER, for the person who realizes the "real" intention of the Federal Reserve to bring the cost of goods/services higher via a (hopefully, controlled) rise in inflation...and thus a decline of the dollar...then you'll quickly see why its imperative that people become investors.

It's why it pays to be invested in assets that get inflated (stocks, real estate, commodities, etc.) rather than keeping all of one's money all in cash and strictly being a consumer.

Would you do me a HUGE favor and share these articles on your Facebook/Twitter pages? Thanks!

God bless!

Comments
No. 1-10
Sean Hyman
Sean Hyman

Editor

You’re welcome!

Ling
Ling

A good read, especially the last part about Fed. I've never thought of that. Thank you for your great insight.

Sean Hyman
Sean Hyman

Editor

Thanks. Yes, you're welcome.

Rhen46
Rhen46

Great article. Thanks the for sharing of your wisdom.

Sean Hyman
Sean Hyman

Editor

Thank you.

Stories