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August 20, 2011: The relevance of the dollar is being questioned as it stayed range bound despite the equity market sell off, a bond market rally, a commodity asset price deflation and gold touching all time highs.

The other inverse relationship is between gold and the US dollar. Gold has been making new highs, but the dollar index has not made a new low. For instance the June low on the Dollar index  was 73.50, which has still not been broken. This shows that the inverse relationship between the greenback and gold is also not working. In fact most commodities, such as copper and oil, sold off in the recent fall but it did not have an impact on the dollar.

The US treasuries too rallied in past few weeks, which traditionally results in a rally of the dollar, as investors seek a safe haven. However, with the dollar stuck in it's range, this positive co-relation too did not work. 

The price action over the past few days calls to question the relevance of the dollar, which has been at the center of global asset markets. Price movements over a few weeks is not enough data to write off the dollar. But after a historic downgrade, snow balling debt and no serious plan to freeze US government spending, the past few weeks may be a snap shot of the future. 

The chart of the US dollar shows that the greenback is at a level (between 73.50 to 74) where demand exceeds supply. This has resulted a few rallies in the past. Now that prices have come back to it multiple times most of the demand may have been absorbed. The next level of demand is between 72.60 and 73 and prices may head down to that level soon.

Given the break of inverse relationship between the dollar and equity markets, we may not see a rally in stocks on the greenback breakdown. We may see both assets fall. However a fall in the dollar may push gold up further, as it's emerging as the safe haven of choice among investors. 

However, most crucially the price action over the next few months will tell us if the dollar is still relevant to the asset pricing. From what we see gold has been a better predictor of equity and commodity markets. The precious metal is clearly inversely related to equities and commodities for now.

Gold & Silver

We anticipated a sell off in gold last week given it's massive run up. When ever gold has rallied 20% above its 30-week moving average, prices have fallen The first time gold rallied more than 20% above the average was in March 2008. It sold off to fall by  34% over the next few months. The second time gold did it again was in December 2009, which led to a correction of 15%. Last week gold again rallied 24% higher than the average. However, the sell off has not happened. We feel that gold is bullish but overbought and faces the risk of a sell off. 

Silver on the other hand has resumed it's uptrend after falling and consolidating.  Silver too had rallied far away from it's 30-week moving average by nearly 55% before it was pulled down from an overbought situation to neutral. Now with the excess buyers out of silver, it's rising again and may be a safer bet than gold in the short term. Remember buyers are future sellers and excess buyers result in excess sellers, which causes a drop in price.