Larry Kudlow's Strong Dollar Is Easier Said Than Done

Larry Kudlow, the newly appointed White House economic adviser, has made it clear that he supports a strong dollar. Minutes after his appointment on March 14, he even offered a trade based on his policy ideas: “I would buy King Dollar and I would sell gold.”

History suggests that if Kudlow is able to follow through with his policies to create a stronger dollar, this trade will likely work out for investors. From 1974 through the end of 2017, a Federal Reserve index tracking the dollar has increased in 25 calendar years and fallen in 19 of those annual periods. The average annualized returns for gold when the dollar was up in a given year was minus 1.7 percent. In the years when the dollar index finished down, gold was up an annualized 16.4 percent. So gold does much worse in a rising dollar environment. In fact, the correlation of the prices of gold and the dollar is minus 0.6 since 1974, signaling a strong inverse relationship between the two.