For most of 2010, there was an interesting performance correlation between Gold (GLD), Bonds (TLT) and the Dollar (UUP). The three securities were moving mostly in tandem, which is somewhat unusual historically. There is no 'set in stone' relationship between these, but quite often Gold and the Dollar will go opposite directions, for example. And one could conceive that a weak Dollar makes our Government Bonds cheaper for foreigners to buy, etc.
The inter-relationships and connections between large areas of the financial markets such as Bonds, Currency and Commodities is fairly complex and can be obtuse. Here's my take on the story with these 3:
Certainly in this case, we've seen Bonds rally as economic growth looks slow, the Fed is pumping liquidity and buying Treasuries, and investors are looking for any safe return (even ridiculously low ones). Gold is another safe haven in times of turmoil and is often an inflation hedge -- the bullish move in Gold raises the question of whether so-called deflation is in fact present. My view is that we have deflation in some areas of the economy but also have had significant inflation in others, especially those that affect the base middle-class (and below) consumer. The Dollar ... well, UUP had a pretty big downtrend in 2009 and rebounded in 2010 with the Euro weakness (when debt problems spilled over to Europe in a big way). And while a low Dollar will theoretically help our exporting, in general I'm a big believer that a strong currency is a positive thing for a country/economy in the long-term.
So each of these markets has its own story, yet they are related at the same time. Now taking a look at the 2010 performance of these 3 ETFs, below:
TLT, GLD, UUP Performance Chart
So you can see that they moved in tandem for most of this year. That relationship broke down around July, and has since widened. I wouldn't expect the performance correlation to resume as strong as it was earlier this year any time soon. If you are looking at paired/hedged trades, you would want to consider whether this performance divergence will widen, narrow, or stay the same. Traders could consider playing the UUP against either the GLD or TLT in a paired trade. If you have a strong conviction (such as that TLT will eventually correct to the downside from its near parabolic uptrend), you could go Long UUP/Short TLT. Just a hypothetical example, I'm not recommending that trade at this time. Or if you see GLD breaking upwards even further, you could consider a Long GLD/Short UUP. These paired hedged trades can be done through options, ETFs, futures, etc.