Thought and Chart of the Week: Something's Going To Give

It’s unusual to see gold, stocks and the dollar experience such positive correlation (have since last October)... Gold is catching a bid on geopolitical angst and central bank buying… Stocks are riding momentum and bullish sentiment… The dollar is up on high relative yields and geopolitical angst.

I.e., Something’s going to give:

If the dollar continues to rise on yields and geopolitical angst, stocks will crack... Gold, despite the higher dollar, will maintain a bid due to angst and cb buying.

If the dollar continues to rise with yields (spawned by accelerating economic growth), and geopolitical angst wanes, stocks, after a potentially brief stint in all time high territory, will succumb to record-high valuations and rising inflation... Gold will struggle, although inflation may provide some tailwind.

If data and inflation soften (but stop short of recession), and geopolitical angst wanes, the dollar will fall (with yields) and stocks will continue their ascent… Gold will hold up well under those conditions, due to the weaker dollar (and lower yields).

If the data roll over into recession, the dollar will rise initially, stocks will tank, gold may take an initial hit as investors redeem (the things they can) to meet leverage calls on equities, then rebound relatively quickly… As the recession plays out the dollar will ultimately fall as investors rotate to better values abroad (à la the post-tech bubble stretch), and as global interest rates converge… (Note: The yen will be the best performing currency in a global recession scenario).