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Analyst: Gold Shows Low Correlation to Other Assets

Release Date: 
Thursday, June 9, 2011

Nicholas Colas, the chief market strategist at ConvergEx. commented in a research note that gold offers a countercyclical asset to the dollar and other forms of investment.

"The recent rally in [gold] stands in stark relief when compared to equities or, indeed, most other commodities. It isn't that the yellow metal has no correlation to financial assets at the moment, but rather a negative correlation. Which is odd, given the selloff is just about everything else," wrote Colas.

"The obvious answer is that gold tends to rally when the dollar falls, which is exactly what it has done in the last few weeks. The greater disconnect is that stocks have parted ways on a falling dollar, so we have the unusual situation that the dollar is weakening and equities are in full-on retreat." 

Colas believes inflationary pressures in China are a catalyst for gold's recent gains, but there are a number of factors underpinning gold's rise. "Gold appears to have a wealth of near-term catalysts to support its valuation, ranging from chatter over another round of quantitative easing to the likely large increase in the Federal Debt Limit," the analyst said. "That makes it an ideal near term 'parking lot' for capital while stocks try to find a level more appropriate for a weaker economic outlook," Colas said.

(Sources: "PRECIOUS-Gold steady; palladium firms on auto recovery," Reuters, June 9, 2011; "Gold Is Markets' Friend 'with Benefits': Strategist,"CNBC, June 8, 2011)

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