The Dollar Gold Correlation

With data from the past 3 years, I was able to find a negative correlation between the closing price of th XAU gold index and the UUP Dollar ETF.

What this basically says is that when the dollar goes up in value, gold goes down in value (or when the dollar goes down, gold goes up) - is there a predictive correlation between one or the other.  They influence and balance each other out during the trading day.  Looking at the scatter plot, there are definitely bunches of values that are grouped.  The next step would be to see when they are grouped and when they are not.

In this last graph we see that the period from March 2009 to February 2010 (inclusive) was the most highly-correlated of the data examined.  The correlation was a negative correlation. From March 2010 to the present (November 2010) we see that there is a weaker correlation between gold and the dollar.

Conclusion: most of the time the dollar and gold are negatively correlated.

Now to figure out why there are changes in the correlation - why do both instruments fall or rise in tandem?  If the dollar rises it means people are trading in their foreign currencies.  If gold also rises it means people are trading in their dollars.  So a guy with Euros buys dollars and then buys gold?

So the next step in this correlation puzzle would be to see where large FX holders traded in their stuff for gold.