“Regarding the Permanent Portfolio, would you beleive the Kiwi Dollar runs most of the time at 80% to 90% correlation to it? Especially since the lows of 2009 the overlay is remarkable. Buying or selling t he Kiwi Dollar makes a simple permanent portfolio even simpler!”

Eoin Treacy's view Thank you for highlighting this interesting correlation which alludes to the Permanent Portfolio mentioned in Tim Price's piece posted by David on Monday. I replicated the correlation for the Permanent Portfolio Fund to the Australian and New Zealand Dollars using Bloomberg. As you point out the correlation between the Permanent Portfolio Fund and the Australian Dollar and New Zealand Dollar are 0.76 and 0.73 respectively since April 2009.

The Permanent Portfolio Fund invests in US Treasuries (35%), Gold & Silver (20% & 5%), Aggressive Growth Stocks (15%), Real Estate and Resources stocks (15%) and Swiss Franc assets (10%). The fund completed a lengthy period of underperformance from 2002 and trended consistently higher until May 2008. It recovered swiftly from the late 2008 lows and rallied consistently until April 2011. The lengthy range that has unfolded since is inconsistent relative to the previous trending phase. It will need to hold above $45 to avoid Type-3 top formation completion.

While on paper the correlation between the Permanent Fund and the New Zealand Dollar has been quite high, the performance of the currency has been considerably more volatile. It has been ranging against the US Dollar for the last couple of years and has returned to test the medium-term progression of higher reaction lows near 76¢. It will need to hold above 75¢ if the benefit of the doubt is to continue to be given to higher to lateral ranging.

Considering the loss of momentum in the fund and its divergence with the performance of the currency we have no guarantee that the correlation that has been evident since 2009 will continue to hold in future. I am reminded of Heisenberg's Uncertainty Principle; the more we know about the position of the particle the less we know about its trajectory. The more a correlation is perceived to hold true by investors, the greater the likelihood they will act to anticipate it which then leads to the correlation breaking down. As ever we will be guided by the price action.