Gold & Relationships

Let’s consider three (3) instruments and their correlation with GOLD

  1. USD Dollar Index
  2. SP 500
  3. Silver

USD Dollar Index (DXY)

Common belief is that USD Dollar index has a negative correlation with Gold. As shown in the following graph, the negative relationship was more prevalent during the period of between 2013 and 2015, whereby the price of gold fell in tandem with an increasing US Dollar Index. At other times, the relationship appears to be ‘mixed’.

Gold vs USD Dollar DXY

The following simple regression shows that given the current DXY level of $94.644, the current gold price of $1,271 appears to be marginally higher than the forecasted gold price of $1,246. Nevertheless, the current actual price is within the 95%-confidence band of $972 – $1,520. Please note that the R-square for the relationship is 51.2% (i.e statistically significant).

Gold Vs DXY Forecast.png

SP 500

We would expect that the SP 500 to have a negative relationship with gold. If investors are risk-on, it is envisaged that they would allocate more capital towards equity / other risky assets. Gold / US treasuries may be preferred investment instruments if investors appear to be risk-off.

The following graph shows that the significant divergence (since 2013) between SP500 and gold (to some extent, this supports the negative relationship theory):

Gold vs SP500.png

As per regression analysis, a negative relationship appears to exist between gold and SP 500. The analysis shows that current gold price of $1,271 is relatively higher than the forecast gold price of $1,053, but it is within the 95%-confidence interval of $816.12 – $1289.93.

Gold vs SP500 Forecast.png

Silver

As both gold and silver are considered as precious metals, we would expect both of these metals to have a high positive correlation:

Gold vs Silver.png

The regression analysis seems to suggest that the current gold price is marginally higher than forecast gold price of $1,228 but it is within the 95%-confidence interval of $1,063 and $1,409:

Gold vs Silver Forecast.png

Something to ponder….

Would this be a pure coincidence that all three regression analysis seem to suggest that gold appears to be higher than its forecast value?

 

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