Since the beginning of May 2019, we have witnessed a correction in U.S Stock Market. For some trading days, we have witnessed stocks down and gold up. News and market analysis all pointed out that because gold has acted as a safe-haven asset. Is it true though ? If it is so, why stocks were down but gold went no where but sideways and down for the last few trading days ? So maybe gold has acted as a safe-have asset as they claimed, maybe not. Let’s find out.
On the below charts, I have compared Gold vs. U.S Dollar and Gold vs. 10Y Bond Yield to find out whether or not gold has recently acted as a safe-haven asset like the news have claimed.
Let’s take a look at the first chart above. The chart contains Gold vs. 10Y Bond Yield. Gold is on the top chart while 10Y Bond Yield is down below. As we can see clearly from last November 2018 until the end of February 2019, gold and 10Y bond yield had a negative correlation. Gold went up from 1200 to 1340 (blue arrow) while 10Y bond yield dropped from over 3% to 2.2% approximately (red arrow). As you might know, there could be a positive relationship between gold and bond prices, or a negative relationship between gold prices and bond yields. In other words, a “fear trade” can increase demand for both gold and bond. So during November 2018 until the end of February 2019, both gold and 10Y bond surely acted safe-haven assets.
But since the beginning of March 2019 until now, gold has dropped from 1340 to 1270 (red arrow) while 10Y bond yield has kept dropping from 2.3% to just over 2% approximately (second red arrow). So during this time, gold and bond yield have had a positive relationship. In other words, a “fear trade” has recently not increased demand for both gold and bond like before. Maybe bond, but not definitely gold .
Now let’s take a look at the second chart above. This chart contains Gold vs. US Dollar Index. Gold is on the top chart while U.S Dollar Index is down below. We just compared two markets from beginning of March 2019 until now, when gold has had positive relationship with 10Y bond yield. We can see clearly that gold and U.S Dollar Index has had negative relationship during this time. Gold has dropped from 1340 to 1270 (red arrow) while U.S Dollar Index has risen from 95 to over 98 (blue arrow).
Sure, people can argue that gold and U.S Dollar index often have negative relationship so there is no surprise here. Well, we do not want to argue that but as you might know, history has proved that both gold and U.S Dollar Index can move in a tandem. Both of them can go up and down together. At least we know from March 2019 until now, U.S Dollar index is favored more than gold. Or we can conclude that investors has recently put their money into U.S Dollars, not gold. In other words, a “fear trade” has recently not increased demand for gold. Maybe U.S Dollar, but not definitely gold.
Conclusion: We know about the trade wars between U.S and China. We see stocks decline. We witness political tensions all around the world. We read the news claiming that safe-haven demand for gold because of trade-wars, or stock market’s correction, etc. However, what we find out is completely opposite. That recently gold has not acted as a real safe-have asset. Instead we see money flow into bond, and into U.S Dollars since the beginning of March 2019. This is telling us that the gold market’s sentiment currently is weak even with all the turmoils out there.
We think this is clearly a bad sign for gold. Maybe some day gold would ultimately act as a safe-have asset but not now. Therefore if the bonds yield starts reversing from the lows, or if the US Dollar keeps going up, gold might get hurt very badly. Thus, we think the deep correction for gold, that we are all expecting for, is maybe just around the corner.
Thanks for reading.