November 3rd, 2009

US Dollar Index (DXY), Gold (GLD) and the S&P 500 (SPX)

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). Today, 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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  • nydk7777

    thank you for good information
    i saw your user name many times but
    didn't know you have wonderful blog. danny

  • danny42nd

    thanks for nice information.
    i saw your name many times but didn't know you have wonderful blog. i will visit more often.

    danny

  • Anonymous

    Hi Guru.

    I agree with you. A weak USD would help the economy BUT you better make sure you sell your stocks because in order to assist with exports, less debt, etc the USD is going to have to drop SIGNIFICANTLY.

    As far as the correlation between Gold/USD is concerned, it is certain. Just take a look at Gold priced in other currencies. It is only at new highs priced in USD. Therefore, I don't believe Gold is in a new bull market but up only because USD is weak.

  • Anonymous

    I guess everyone who isn't shorting this market is rooting for the dollar to continue falling. I'd like to see it continue dropping until the S&P hits 1200. I still need more time to escape some of my problem stocks.

    And about this inverse relationship, how is it that the market seems to turn on a dime? Who exactly is causing such dynamic shifts from hour to hour or minute to minute? It seems to be so violent you can get whiplash watching the screen…

    -Steve in L.A.

  • elboroom

    Joseph,

    I find your blog posts insightful and appreciate you giving your opinion on where the markets may head.

    There is a reason that the S&P and other markets and commodities have an inverted relationship with the $USD. It's because each of them are theoretically or actually denominated in dollars. SO (in the case of the S&P), when the dollar is weak, the 'price' of the S&P moves up since it now will take more dollars to buy hypothetically a 'unit' of the S&P. It has little to nothing to do with profits made overseas. If profits overseas were the cause of the rise, we would not see those profits reflected in the price of the stock market so immediately (often the same day). The price of the stock market would not rise until after most of the corporations involved reported the profits, which would probably be the next quarter.

    This theoretical link of the stock market to the dollar has further implications…

    All the best,
    Evan

  • A Streak of Grey

    First off, thanks for all that you do. I follow the blog closely and I really appreciate the knowledge and hard work that goes into the information here.

    The inverse relationships are clear and my belief is that the Fed is purposely 'encouraging' the weak dollar. For now it serves their aims, but if inflation comes back I believe that we will see the greenback make a comeback.

  • Anonymous

    Hi SC,

    thank you for answering my question and sharing your thoughts on the DXY on your Facebook page. As an Australian I feel that a higher AUD has a negative impact more so on our commodity export based economy. A lower USD would of course make American made products more appealing to export to the rest of the world.

    My second thought regarding the USD is that a falling dollar equates to more risk taking via the USD carry trade. A spike in the dollar index could give some clue of an unwinding of risky positions an a move back to cash by large players.

  • Anonymous

    $4.00 gas,$4.50 loaf or bread,more layoffs,
    Should be great for xmas season
    oh oh oh POP GOES THE BUBBLE

    Its a Wall Street Thing,3x shorts all the way starting with Brazil

  • ryan

    i guess the u.s. needs to regain its competitiveness in the exports arena. A lower us$ will surely help. Producer exports more, retain its employees and then create more jobs by expansion and rejuvenate the economy. If the economy cannot retain jobs and create employment thereon, whatever ways you look at things..it doesnt matter. Interestingly, employment over population ratio and velocity of money are quite correlated.

  • Anonymous

    The USA has nothing left to export citizens.Nobody on planet Earth buys our products wholesale but us.The Chinese are most likely buying up everything they can see in the USA real estate markets,just like the Japanese did in the 1980s.I really hope the Chinese rob this country for all its worth.I wish them well.I can then sit back and live off the Chinese and USA governments for the next 35 yrs.God bless me

  • Anonymous

    There are people on cnbc talked about dollar rebound, which will cause SPX go down..what is your take on that?

  • Joseph Meth

    It's less a question of "if?" than "when?" and "by how much?"

    There could be a 4-6% bounce (DXY to 80) by the end of QI 2010 but by YE 2010 we could be down much further from here.

    Just my humble opinion (IMHO).