Gold hasn’t been itself lately

١١ سبتمبر ٢٠٢٠

There was this substantial rise in Gold in July. Touted as the “safe haven,” many reasons were stated as the reasons for Gold’s rise. Inflation, currency debasement, risk-off, etc.

However, I believe we saw three different types of correlations in Gold this year. The first one was the “risk-off” trade. Investors and traders buy up Gold during the equity rout.

The second period combines two very similar mindsets in investment in Gold. The first one can be associated with “institutional money,” quoting currency debasement and inflation. The second one comes from retail investors, who have been plowing money into Gold ETF’s such as GLD, quoting what institutional investors stated. This pushed a strong bull rally in Gold, as investors and speculators press onto the yellow metal alongside a risk ON market.

Now the gold dynamic has taken a new personality. We saw substantial swings in the equity markets in the last two weeks, with the equity markets diving as of late. However, Gold entered a consolidation – not making the “risk-off” moves we saw earlier this year. This is after Gold sold off near the $2,100 market as investors feared the bull run for Gold had run its course. Is the Gold’s silence a sign of more things to come? What other things can we deduce from these three different correlations?

The silence in Gold highlights its bull run was more on positive sentiment, not the risk off-trade.
The silence during this period, where Gold is supposed to be the outperformer, suggests that the interest in Gold was due to more of a speculative Bull bull run, disguised as the “save haven” trade.

The stretched valuation in Gold may favor bonds in the safe-haven trade
The bull run giving Gold new highs has insinuated investors’ minds that Gold is overstretched. Safe-haven assets are supposed to have an inverse correlation with risk-off assets. However, Gold as not exhibited that in the past couple of months. Nor has it exhibited risk-off, “safe haven” characteristics either. Furthermore, safe-haven assets should not have the stigma “oh, its overstretched” – Bonds don’t have that stigma or cash.

However, another explanation could be that Gold has been right all along?
An explanation to the rally could be that investors were worried about the potential selloff due to equities’ rallying. Therefore, when equities did selloff, Gold was perfectly priced. This is on top of institutional money and general interest in the metal citing devaluation and inflation.

Whatever the reason is, the mentality of whether Gold is overstretched or not should be a trait safe-haven assets should have. If you’re looking for a legitimate safe-haven asset, you may want to look in bonds. Or better yet, hold some cash to take advantage of the dip.