#11 August 26, 2011 MARKET DEFIES CORRELATION AS INDICATOR

During this period, gold had been acting as a safe haven alternative investment to equities, moving in almost inverse lockstep fashion to equities. The correlation between the two markets was running out – 0.9. Preceding the day in question, it can be seen that the downswing and upswing in gold corresponded to an upswing and downswing (moderate) in the NASDAQ. On this particular day, equities reversed sharply from lower to higher. The strong reversal to the upside should have resulted in a decline in gold. Instead, gold rallied sharply as well. This ability of gold to shrug off a strong move in an inversely correlated market implied potential strength. In the following week, this implication was realized as gold moved to new recent highs despite a strong rally in equities (red oval).