Gold has come a long way in the last ten years, from a forgotten backwater with few investment options or interest to a dominant theme found in portfolios ranging from John Paulson to Joe Six-Pack. It has also become a proxy investment for those opposed to the anti-capitalist policies now dominant in Washington.

Among the selling points for gold as an investment has been that it s a hedge against a falling dollar, a fact mentioned by nearly all of the ads that now dominate cable TV.

As Seen on TV

TV Advertisement Gold protects against a falling dollar

Yet as we ve pointed out in the past, oftentimes two markets that are supposed to correlate don t. Anybody with a position in gold has probably noticed how it hasn t moved in opposition with the dollar lately, but right along with it.

A Strange Pair

Powershares US Dollar Index Bullish (UUP) vs. SPDR Gold Shares (GLD) Year-to-date

Even a cursory glance at a year-to-date chart of PowerShares DB US Dollar Index Bullish, which tracks the value of the U.S. Dollar against SPDR Gold Shares, illustrates the surprisingly close relationship.

Hard data confirm the suspicion. The rolling three-month correlation between gold and the U.S. Dollar Index hit 0.34 last week, meaning the assets now show the highest tendency to move together in nearly twenty years. Historically, gold has tended to demonstrate a negative 3-month rolling correlation with the dollar, ranging from -0.30 to -0.80. But both benefited from a safe haven bid in the first half amid a meltdown in Europe. Recently gold has corrected even as the euro has risen, causing both the metal and the greenback fall.

Gold vs. U.S. Dollar Index: Rolling Three-Month Correlation of Return

Source: Bloomberg, Rosewood Research

The point is that you should trade the security that most closely matches your market expectations. Historically, gold tends to negatively correlate with the dollar, but is affected by supply and demand like any other commodity. There are a myriad of reasons why investors opt to include gold in their portfolios, but as 2010 has already shown, it doesn t always move as it should. Many of the TV ads leave that part out.

For years we've covered currency-linked securities that track individual currencies, the U.S. dollar index, as well as the burgeoning world of online FX foreign currency trading. If betting against the greenback is your interest, those options present a much better match than gold.

At the time of writing, Hoenig held positions in many of the securities mentioned.