The Tycoon Report

DAX and Gold - Did an Ongoing Correlation Begin in 2003 - a Correlation Which Persists To This Day?

From 1991 through the first quarter of 1996, the price of Gold ranged between $579 and $659. From mid-1996 to early 2001, Gold was in a general decline which bottomed at $393 on April 2, 2001 and then began a rise.

During the same time period, this was roughly the inverse of the performance of the DAX, which rose slowly from 1991 to 1996 and then began a rapid advance which culminated at the peak on March 7, 2000, followed by an apparent a-wave decline into the low of March 2003. Up to that point, therefore, there was either no correlation or a negative correlation between the DAX and the price of Gold.

An apparent wave b advance in the DAX began in April 2003. From that point forward, the price of the DAX and the price of Gold rose in general synchrony until early 2006. From then until mid-2007, Gold leveled off while the DAX continued to climb. Late in 2007, Gold rose rapidly in “catch-up” fashion until early 2008 when both of them turned down, and have been in rough lockstep since, marked by time-lags which are more clearly evident on Weekly charts. On the Weekly time scale, it appears that the DAX moves first, and Gold follows.

What was it that occurred in April 2003 in order to precipitate the apparent new correlation between the two, which has persisted ever since? From the Elliott perspective, no external event “occurred” in order to “precipitate” anything. Rather, the shift was the result of an indigenous change in mass psychology.

Two excerpts dated in back-to-back months may help to pinpoint that shift. Mark Tran of the Guardian reported on April 25, 2003 that “The fragile nature of Germany’s economic recovery was underlined today when a key index of business sentiment slipped slightly in April. Contrary to expectations, the Ifo institute in Munich said its west German business climate index fell to 90.5 in April from 91.5 in March. Analysts had expected a rise to 92.1. Genot Nerb, an economist at Ifo, described the dip as normal as there were always months ‘when you have a slight correction.’….Mr. Nerb said that the dip in sentiment came largely in the retail and wholesale sector, while manufacturing and construction remained stable.”

Yet just one month later, on May 26, 2003, Bloomberg.com reported as follows: “German business confidence unexpectedly rose in May from a 16-month low….Germany’s $2.4 trillion economy contracted in the first quarter as surging oil prices, the war in Iraq and the euro’s appreciation against the dollar deterred business investment. With the conflict over, consumer confidence has recovered from an eight-year low and energy costs have dropped….Retailers led the index’s increase in May, Ifo said. Confidence among consumers rebounded in April and spending by shoppers, which accounts for more than half the economy, helped moderate the first quarter’s contraction….Germany’s DAX Index has advanced 29 percent since dropping to a seven-year low on March 12.” (Emphases added).

So, it was a turnabout in consumer confidence that set the DAX on fire. It was evidenced by a quite spirited advance in the DAX in April. Retailers totaled up their April sales, which resulted in their own increase in business confidence as reported in the Ifo index in May. At about the same time, the Euro began a strong advance against the Dollar. The Euro and Gold have danced very roughly together, especially beginning in January 2006, and have continued the dance to the present time. The DAX and Gold have done likewise.

I have searched the news records of the time (hardly a microscopic search, to be sure) for any mention of a particular occurrence which might be identified as a “cause” of the reversal in consumer confidence in April 2003, but could find none.

Perhaps the apparent correlation between the DAX and Gold is nothing more than a reflection of the inverse performance of the Dollar relative to the Euro and relative to Gold.

May I respectfully offer these takeaway observations: (1) The DAX, Gold, and the Euro were not “all the same market” prior to April 2003. Since then, they have been so, in rough approximation, and they remain so; (2) there was no identifiable external “cause” of the turnabout in consumer confidence in April 2003; (3) at the moment, the correlation between them appears to be especially tight. One wonders to what degree, if any, that has to do with the worldwide contraction in the availability of credit, and what the upshot may be.

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William Kurtz October 21, 2008