Is Gold a Shadow Currency ?

My friend and hedge fund manager pal Paul Brodsky is quoted in the WSJ discussing Gold as a Currency.

“Over the past 30 years, the correlation between the dollar and gold is minus-0.65—a high negative correlation. It means the dollar and gold are effectively on opposite ends of a seesaw. When the dollar is in favor, gold retreats. When it is under pressure, gold prices swell.

Look at the nearby chart. It is like a photo of a mountain scene reflected in a tranquil lake. The rises and falls and horizontal meanderings of gold are nearly the negative of the dollar’s.

The implication is that gold isn’t a commodity—at least not one that hews to the definition of something that people and industry consume.

Instead, “gold is a currency” whose daily price is a gauge of the market’s concern about the “potential diminishment” of the purchasing power of the dollar and other paper currencies, says Paul Brodsky, a principal at New York’s QB Asset Management.

If he is correct, it is the potential longer-term weakening of the dollar that is the real issue for the gold market, not inflation or deflation.”

If gold were a currency, you could use it at the supermarket to buy juice, eggs, milk etc. What Paul is really saying is that Gold acts like an alternative to fiat currencies, in large because it is  priced in (declining) dollars.


Rethinking Gold: What if It Isn’t a Commodity After All?
WSJ, AUGUST 21, 2010

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