Gold's Erstwhile Bull-Market Chums
Adrian Ash, February 8th, 2010
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Gold's Erstwhile Bull-Market Chums
by Adrian Ash
Gold is now more closely correlated with US stocks than with either the Euro or silver...
OKAY, this is getting weird. Too weird, in fact.
And weirder still, no one else has yet noticed...
It might just be me...if not my nicotine D-T's.
But every time I look, there they are. Gold and the S&P500. Right at the same level. Minute by minute, session by session...
What in the Simon Cowell can this mean?
"It is easy to see why the Euro fell [this week] and one could then say that the Dollar is the obvious alternative," writes Phillip Coggan in his Buttonwood blog for The Economist.
"But what about gold? Hasn't that been rising on fears that spendthrift governments would debase their currencies? Yet when these fears started to look real [with the Eurozone crisis], gold fell 4% on Thursday..."
Well, yes and no. Gold always rises on fears of default or debasement. Because that's what it's for – hiding out when everything else falls in value, not least money itself.
But as gold has tripled and more over the last decade or so, it has also been rising thanks to that very debasement itself. Or rather, it's risen on the leverage which debasement enabled. Any pause or reverse in that leverage thus means the gold price can slip, whether or not debasement unwinds.
To recap: Gold began rising last decade because a handful of people saw deep trouble ahead in the race to slash rates. Also known as debasement, that race – led by the Fed, which then feared deflation in the face of untold corporate-debt burdens – took the cost of money below the rate of inflation pretty much worldwide.
Thanks to those record-low rates, global stocks all found their floor by March 2003. Yet the Fed waited another two years before teasing rates higher...and by then, this historic flood of cheap money had found a new use in finance:
Paying for leveraged bets against the Dollar itself.
Hedge funds, prop' desks...even retail investors and the weekly financial press...everyone saw that the Dollar was falling, yet the Fed refused to step out and catch it. Because the falling Dollar was also funding go-go days for home-builders, plus 10% year-on-year gains in the Dow.
Gold, naturally, was a prime mover in this bear market for cash. But with everything rising, gold's singular value seemed to offer just one more "risk friendly" trade.
You selling Dollars or Yen...swapping them for Euros or crude...? Then get yourself long of gold futures! Because that stuff's the ultimate carry trade, mate – a pure speculation on repaying your finance with devalued cash.
