Marketwatch Article Builds Hope On Short Term Gold-Dollar Concurrency

Maya Saefong's latest Marketwatch column pursues the recent positive correlation between the greenback and gold, and gets several comments whose thrust is that it's good news for the metal. If the positive correlation holds when both are rising, as is the case now, then fiat currencies are becoming more distrusted. The dollar benefits from crisis mode, as we've seen, but gold also benefitting points to discounting of future weakness in the greenback.

Some of her sources became enthusiastic over the possibility of a sustained positive correlation, as it would mean that the greeenback is the least-worst currency in a time of general debasement. Others were more cautious. All of them were bullish on gold, even the expert at the end who expressed skepticism about the positivity:

Ned Schmidt, editor of the Value View Gold Report, wasn't quite so optimistic. "In a world where U.S. dollars are becoming relatively rare, little reason exists for the value of the dollar to fall against other currencies," he said, emphasizing that he doesn't see any decoupling between the dollar and gold.

"No inflation in the U.S. and lack of money supply growth means no inflation will arise," so the dollar will not crash and gold "will have one more rally before hitting lows in the coming summer," he said....

"Lack of money supply growth in the U.S. will force the Federal Reserve to take action by fall," Schmidt said. "That will send gold to new highs."

I don't want to spoil the party, which is on parade in the column itself, but it seems like a lot of gold fever is being generated from a relatively small sighting. So far, the positive correlation is short-term. It can be entirely explained by panic buying of the U.S. dollar and safe-haven buying of gold in consequence of the Eurocrisis. Once that crisis faced, the correlation is likely to go negative again.

In the magic year 1979, gold and the greenback were postively correlated over a period of months - not days. This last year, there have been times when short-term positive correlation had faded in and out. The global-debasement theme won't be validated until there's a sustained bull rally in both. The dollar has co-operated in the rally department, but gold hasn't (at least as yet.)