I recall that the last time gold price sharply rose was back in August when the markets stirred up over the U.S. debt ceiling debacle which was followed by the S&P’s downgrade of U.S.’s credit rating. Back then gold price reached a record high of nearly $1,900 the U.S. treasuries yields also fell precipitately as the anxiety level in the markets rose, traders became risk averse, American stock markets plummeted and the demand for safe haven investments was high. Now the demand for U.S. treasuries is high, the American stock markets are falling again, but gold price is also falling. Is gold still considered a safe haven investment among traders?
Let’s check the recent changes in the relations among gold price and other investments:
Relation between U.S. Treasuries and Gold Price
During November gold price and 10 year U.S. treasuries yields seem to have a strong positive relation and as gold price declined so did 10 year U.S. treasuries yields.
This positive relation is also confirmed when we examine the linear correlation of daily percent changes of gold price and 10 year U.S. treasuries yields.
The chart above shows the change in the relation between gold price and 10 year U.S. treasuries yields. During August when the anxiety level in the markets was high, the correlation was negative, i.e. as gold price rose, the 10 year U.S. treasuries yield fell, so that the demand for both investments rose. But during October-November the relation turned from negative to positive. It seems as if the relation between gold and U.S. treasuries turned from being complementary investments to substitute investments.
Relation between U.S. Treasuries and U.S. Stock Market
It’s well known paradigm that U.S. treasuries and U.S. stock markets are considered substitute investments: as traders and investors tend to take more risk, the demand in the U.S. stock markets tends to rise while U.S. treasuries yields rise (all things being equal); the market becomes more conservative and risk averse, the demand for U.S. treasuries tend to rise and the U.S. stock markets fall. If this paradigm has merit, the relation between the U.S. treasuries yields and U.S. stock markets indexes should be positive.
The chart below shows the strong positive correlation between the daily percent changes of S&P500 index and 10 year U.S. treasuries yield daily changes during recent months.
Relation between Gold Price and U.S. Stock Market
The final chapter is the relation between the U.S. stock market and gold price. This relation also changed in recent months from a relation of two substitute investments to two complementary investments.
During November the gold price and S&P500 index seem to develop in the same direction as seen in the chart below.
The change in the correlation between gold price and S&P500 index is presented in the chart below. During August and September the correlations between the daily percent changes of gold price and S&P500 index were negative as you would expect for substitute investments, but during October and November their relation shifted to become positive.
All these charts show that it seems that gold has shifted from being a safe haven investment such as U.S. treasuries (assuming you still consider U.S. treasuries safe haven, which I do), to a riskier investment such as U.S. stocks.
The question is what happened in the recent months that could explain this shift in market sentiment?
I think that the recent raises in the gold maintenance margins requirements by CME may have been among the factors to make this shift. The last time the CME raised the margins for holding gold was back in September 24th. It could be that the last margin hike may have pushed many conservative traders to reduce their exposure to gold and thus leaving more risk takers traders.
If the relations among the American stock markets, U.S. treasuries and gold will continue to be as they were in October and November, this could affirm this theory.
For further reading:
- Gold & Silver Prices – Daily Outlook November 24
- Gold Price and Silver Price Weekly Forecast November 21 – 25
- Gold and Silver Prices Monthly Outlook for November 2011
Lior Cohen, M.A. commodities analyst and blogger at Trading NRG.
This is by no means an investment advice only market analysis; please see here full disclaimer.