Friday, October 9, 2009

Stocks relative to gold (2)

Here's yet another look at the relationship between equities and gold. The relationship here is not quite as strong as the one between equities and the dollar that I posted yesterday, but it nevertheless fits in with the same story. Gold has been rising as the dollar has been depreciating, so it makes sense that there is a positive correlation between gold and equities (since there is an inverse correlation between the dollar and equities). The underlying dynamic at work is a decline in the demand for dollars, as the world attempts to reduce its holdings of dollars and increase its holdings of risky assets (e.g., equities, gold, commodities).

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