Has Gold Lost Its Shine?
Earlier this year, I talked about a “perfect portfolio idea,” which included buying the NASDAQ and Gold. The basic idea was based on a positive correlation between the two assets on an uptrend, with Gold staying relatively flat if the NASDAQ fell. Gold fell alongside equities today, falling around 1.67% to $1,877 an ounce.
However, the correlation has broken down in the past two months. More specifically, Gold’s “safe haven” nature has broken down; however, it continues to have a positive correlation with equities.
Is Gold losing the main strength it has?
The hedge against inflation remains strong. As long as the Federal Reserve continues to prop the economy, alongside further potential stimulus after the election, should push the power of the US dollar down, possibly boosting Gold
However, there may be a supply-side issue for Gold
With Gold back ETF’s experiencing record high inflows, demand for the yellow metal has been at an all-time high. However, according to the World Gold Council, Gold production fell by 1%, a first in a decade. This may be attributable to the Coronavirus disrupting Gold mining around the world, restricting supply.
Analysts predict this may be another bullish sign for Gold, with Matt Miller, vice president of equity research at CFRA Research, stated that “It’s kind of a perfect storm, Or a better way to say it is the fundamentals for gold may be never stronger than they are now.” He further states that his view is that “Gold continues to trend upwards” with “more and more of that is going to come from the recycling, which basically means that gold is trading hands.”
One fundamental problem for Gold as a safe haven
However, the main problem for Gold is that it essentially tries to “have its cake and eat it too.” The typical safe haven, Bonds, has the main characteristic that Bond has: they appreciate risk-off episodes and keep their value on risk on episodes. However, if you have seen any analyst cover Gold, they talk about when Gold will start rallying or when Gold will hit its next all-time high. A safe haven asset should not have this characteristic of risk, a characteristic of speculation.
However, the correlation has broken down in the past two months. More specifically, Gold’s “safe haven” nature has broken down; however, it continues to have a positive correlation with equities.
Is Gold losing the main strength it has?
The hedge against inflation remains strong. As long as the Federal Reserve continues to prop the economy, alongside further potential stimulus after the election, should push the power of the US dollar down, possibly boosting Gold
However, there may be a supply-side issue for Gold
With Gold back ETF’s experiencing record high inflows, demand for the yellow metal has been at an all-time high. However, according to the World Gold Council, Gold production fell by 1%, a first in a decade. This may be attributable to the Coronavirus disrupting Gold mining around the world, restricting supply.
Analysts predict this may be another bullish sign for Gold, with Matt Miller, vice president of equity research at CFRA Research, stated that “It’s kind of a perfect storm, Or a better way to say it is the fundamentals for gold may be never stronger than they are now.” He further states that his view is that “Gold continues to trend upwards” with “more and more of that is going to come from the recycling, which basically means that gold is trading hands.”
One fundamental problem for Gold as a safe haven
However, the main problem for Gold is that it essentially tries to “have its cake and eat it too.” The typical safe haven, Bonds, has the main characteristic that Bond has: they appreciate risk-off episodes and keep their value on risk on episodes. However, if you have seen any analyst cover Gold, they talk about when Gold will start rallying or when Gold will hit its next all-time high. A safe haven asset should not have this characteristic of risk, a characteristic of speculation.
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