Why Gold And The Dollar Are BOTH Rising

An unusual dynamic has taken shape over the last few months – Both the US Dollar and Gold have been rising together. Normally, such a movement would seem counter intuitive as Gold is a commodity and commodities tend to move in the opposite direction of the US dollar. There is a slight caveat, however, to the Dollar-Commodity relationship which exists during extremely rare occasions and that is gold (along with silver) doesn’t always function as a commodity. There are times when it behaves more like a currency. This is one of those times.

Essential to understanding the recent phenomena is to understand why the US dollar is rising in the first place. During periods of economic uncertainty, money tends to flow into the country with the “Safest” currency. That’s the reason the Dollar spiked in late 2008 and is why it is moving up now. “Safe” currency appreciation can be viewed as a fear indicator, especially when the fundamentals of the underlying currency do not support such a movement.

Money has also flowed into “Alternative” currency’s such as Gold and Silver as ballooning government debts and sovereign credit risk erode investor confidence in ever-inflated paper currencies. I should add that if the fundamentals of the US were strong, we would not have seen Gold rise along with the US dollar. Skepticism of US dollar based assets is causing investors to hedge their bets with BOTH the “safe” currency and the hard currency.

The catalyst for the recent aggressive buying of both the US Dollar and Gold is fear. More specifically, fear of the European Currency as EU member states reached the brink of collapse requiring massive Euro injections. The chart below shows that as investors sold off Euro holdings, Gold began acting like a currency, rather than a commodity, rising along with the US dollar.

Bottom line: Euro fear and “Safe” currency skepticism has caused gold to behave as a currency.