Is there really a correlation between the U.S. Dollar Index & gold, and stocks & gold?

I’ll cut right to the chase: Unless you’re about 80 years old, the United States economy is undergoing the worst downturn in living memory. Every measure of growth is grim. The worlds most recognized stock index — the Dow Jones Industrial Average– is down 30% from its October 2007 all-time high.

If ever there was a time for the “Safe-Haven” lure of precious metals to surface — now, yesterday, even seven months ago when the Bear Stearns’ bailout launched the historic reshaping of Wall Street — would have been it. Yet — from its March 17 record peak, GOLD prices have plummeted more than 20%.

As for an explanation, the mainstream experts have prepared an “exception” to the Economy Down, Gold Up rule: A rise in the U.S. dollar. On this, the dramatic events of Friday, October 10 say plenty.

On that day, the U.S. Dollar Index soared to a 14-month high against a basket of the world’s key currencies – AND – Gold prices plummeted $88 an ounce in the metal’s steepest one-day drop EVER.

“Gold drops sharply as dollar jumps,” began one October 10 news source. “A stronger greenback reduces appeal of gold futures contracts as an alternative investment.” (DJ MarketWatch)

(Getting A Hold On Gold: Only those who saw the reversal in gold’s gains BEFORE they occurred can say when the current downtrend will end. Get the complete October 2008 Financial Forecast Service today.)

Sorry Charlie, such logic does not fly. And to prove it, the July 21, 2008 Short Term Update put together a myth-busting chart of the 52-week correlation between the U.S. Dollar Index & gold, and stocks & gold since 1999. (Reprinted below)

Amidst the confusion of failed cause-and-effect analysis, it’s easy to lose track of actual events; namely this: Since setting a record high on March 17, gold prices have lost more than 20% in value. In the days leading up to the reversal, Elliott Wave International President Bob Prechter went against the bullish gold bandwagon and presented a special March 14 Elliott Wave Theorist. In Bob’s words:

“What’s Next For Gold? If the relationship shown here holds true, and if gold behaves as it did in 1980, it should peak concurrently with the economy.”

That same day, the March 14 Short Term Update presented a powerful close-up of Gold with the headline: “Waiting For A Reversal.” STU wrote:“Gold hit the psychological motherlode yesterday when it pushed to $1,000. We may have to wait until closer to the end of the week before prices make the turn lower, but any decline beneath $960 should be a clear warning that the declining phase is starting.”

What followed — a six-month long, 30%-plus selloff to a one-year low on September 11 — speaks for itself.

Don’t get distracted by OUTSIDE fundamentals. Get the inside scoop on gold’s near, and long-term trend changes via a risk-free subscription to the complete Financial Forecast Service.

Elliott Wave International