Paired investment

[wp_lightbox_prettyPhoto_image link=”http://www.economicsignature.com/wp-content/uploads/2018/02/20180226-DOWvsGLD.png” description=”Pared investment: Dow vs. Gold. When stock markets plunge, the money previously invested in stocks would like to park at a safer harbor, such as gold. Therefore, the two curves show negative correlation.” source=”http://www.economicsignature.com/wp-content/uploads/2018/02/20180226-DOWvsGLD.png” title=”Pared investment”]

 

There are many types of markets, such as stocks, bonds, currencies, real estate, and commodities. Markets can be segmented by geographic regions as well. Some of the markets have special relations and can be paired to identify their trends.

For example as shown in the above chart comparing Dow with gold (GLD), when stock markets plunge, the money previously invested in stocks would like to park at a safer harbor, such as gold or bonds. Therefore, the two curves show negative correlation.

In another example, crude oil is priced by US dollar. When the dollar firms up, oil prices will fall because the buying power of the dollar increases. The same logic applies to dollar-denominated commodities.

When emerging markets begin a bullish trend, more US investors would like to pour their money into the markets. The currencies of the emerging markets will appreciate, and US dollar will depreciate.

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