Speaking of equities gaining on a weaker dollar, you might consider reading this study by Schnidman and Nadler (not this Nadler) that reveals just how strong the inverse correlation (since 2008) between the USD Index and the SPX (S&P 500) has been. The relationship has perhaps been more consistent than the historically weaker -0.27 that the greenback versus gold has exhibited (a figure which comes as a shock to many who equate buying gold with the most effective anti-dollar bet).
In the period since 2008 there have been numerous occasions on which gold and equities made tandem advances despite the historically inverse correlations they had been exhibiting. Until the Fed made easy money available to speculators and until the losses sustained in 2008 – following which buying everything in sight was the only way to try to make back such losses – gold was supposed to be (and was) a fairly effective hedge against declining stock portfolios. Now, the Dow finds itself at its best level since…2008 and gold is nearly $700 higher than its best price of that same year…
CPM Group NY-sourced metrics in fact reveal that conventional betting against the dollar with gold – in view of that correlation figure (and even the more recently higher one) – results in losses half to two-thirds of the time. As for the buck and the S&P or the Dow, well, the relationship could dissipate if and when the European situation shows signs of abating. Consider that the next time you hear Mr. Gingrich assuring you of a robust dollar (in the same breath as promising a moon base by 2020).
As for commodities, well, certain nations (indeed, entire continents) have become so dependent on their offtake and continued gains in prices that (almost) existential threats would be posed to them in the event of a sizeable downdraft in values. From Davos, intrepid Marketwatch reporter Polya Lesova fills in the blanks as follows: “South African President Jacob Zuma said on Thursday that a sharp fall in commodity prices poses the biggest risk to resource-rich African economies. “This could cause a severe shock," he said at a panel discussion on Africa at the annual meeting of the World Economic Forum in Davos.
Whether or not the Fed made an “elemental mistake” with its Wednesday promises, even as it sought to balance the equation with inflation and interest rate targeting of the explicit variety, remains to be seen. For the moment, the risk remains multi-faceted: bubbles could still over-inflate, investors could still bet incorrectly, and the Fed (as the ECB in the other direction recently) could be made to eat its own press conference words. Well before the end of 2014. That, provided the engravers of the Mayan calendar were not under the influence of too much coca leaf chewing-induced “inspiration” and could be proven correct in their take of how 2012 ends…
Jon Nadler is a Senior Metals Analyst at Kitco Metals Inc. North America