RBC reminds investors that yes, gold has been correlated to the dollar. Which one imagines should be the case.
Yet they interestingly highlight that this correlation has increased to 1.2x since 1996.
Looking at the most recent years, things start to appear problematic.
Since the end of 2005, gold has roughly doubled in price. Yet the dollar did not halve in value on a trade-weighted basis. It went from about 90 to 75. Thus the dollar fell ~16.7% while gold jumped 100%, which means gold went up about 6% for every 1% drop in the trade-weighted dollar. These are approximate numbers, yet well beyond the long-term correlation.
This might show how expectations can take hold of gold prices and advance the metal well ahead of what actually happens to the dollar.
Thus gold at a $1,000 likely prices-in a lot of further dollar depreciation already. If the dollar depreciates, but not at such a pace that would take the trade weighted USD to, say, 45 within a few years (just throwing a number out there), then gold could “miss expectations” just like a high PE stock can sometimes fall even when a company’s earnings keep growing (but don’t grow fast enough).
Measuring exactly what expectations are priced into gold is nearly impossible.
Yet the ~6x levered gold move against the trade-weighted USD in the last few years (100% vs. -16.7%), argues that gold has gotten ahead of itself to some degree. It seems highly unlikely that 6x inverse correlations can last forever. Beware mean-reversion to longer-term historical norms.
(Chart via FTAlphaville)