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Indecent Exposure [to Commodities]

Inverse Correlation

An inverse correlation is defined as: "A contrary relationship between two variables such that they move in opposite directions." Meaning, if items A and B are inversely correlated, when A moves up, B moves down by roughly the same percentage. And vice versa.

Below is a chart of the U.S. dollar over the past five years, as tracked by the PowerShares DB U.S. Dollar Index Bullish (UUP):

UUP Chart

UUP data by YCharts

While many in the financial media have been calling for the U.S. dollar's precipitous decline to worthlessness thanks to the Federal Reserve's quantitative easing, clearly that has not been the case. But we have seen a slow and steady weakening which is evident in the chart above. The simple argument only makes sense, then, for dollar-denominated commodities to cost more (in dollar terms) in the world of a weakening dollar.

What's inverse correlation got to do with me?

Below is a chart reflecting the dollar (UUP) versus the commodity index (DBC) over the past five years. 

UUP Chart

UUP data by YCharts

As I mentioned here a few weeks ago, fears about slowing global growth may well be overstated.

From the supply/demand side of the argument, this fear is a big part of the reason DBC is inexpensive right now. Take advantage of this and get a favorable entry point to an asset class that belongs in your portfolio anyway.

At the time of publication, the author was long DBC.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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