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Long/Short Investments in L/S Equity: Valuation and Ideas,

Gold + Major Global Currencies And Their Correlations

Gold is generally thought of as an alternative currency rather than as a commodity based on the way it’s traded and due to its utility (or lack thereof in the practical sense). Ever since gold’s convertibility to the US dollar was terminated by the Nixon administration back in 1971, gold has tended to trade in reverse correlation to the dollar as a safe haven, rising when economic optimism recedes and falling when optimism grows.

Gold shares a -0.40 correlation to the dollar, both the highest magnitude of correlation (either positive or negative) among the major currencies and the only the negative correlation.

Others, including the euro, yen, pound, Swiss franc, Australian dollar, and Canadian dollar vary from +0.23 to +0.37 correlations. All data are taken from March 1, 2007 to the present:

(click to enlarge)

Among pure currency correlations, the dollar and euro has the most prominent correlation of any two currencies at -0.93, unsurprising given they are the world’s top two reserve currencies and thus compete against each other directly.

Given the US dollar is the world’s reserve currency, it possesses the strongest correlations to other currencies (all inverse) at -0.50 or greater among the pound, franc, and Australian and Canadian dollars in addition to the euro. It has a milder negative correlation (-0.34) to the yen.

The US dollar is also the least volatile at just 8.7% annualized.