Gold: from safe haven to speculative asset

[ostap]

Gold has a long-standing reputation as a safe haven asset, meaning that it can be expected to appreciate in uncertain times. In other words, gold is one of very few assets being positively correlated with risk (most other asset prices fall with increasing risk). The weak or even negative correlation between gold and most risky assets makes gold an attractive component of a diversified portfolio despite its low historical return.

However, in the recent past, gold has changed its behaviour: instead of being a safe haven and thus being positively correlated with risk, gold has become just another asset driven by speculation (and thus being negatively correlated with risk). The below figure shows the correlation between daily changes in the gold price (measured in USD) and the VIX (a measure of market risk). Until a few years ago, gold was positively correlated with the VIX, which is consistent with its safe haven status. However, starting in 2004, the correlation turned negative and reached its (negative) peak during gold’s moonshot in spring 2006.

This is probably bad news for hard-core gold bugs, as the rise in the gold price since 2006 can probably not be attributed to traditional pro-gold arguments such as the inflation hedge argument or the insurance-against-financial-meltdown argument. At least since 2006, gold has been rising in tandem with every other asset, driven by abundant liquidity and decreasing global risk premia.

Gold will probably not act as a safe haven during the next financial market crisis, as it has been recently driven by the same forces that have been driving all other assets. For the gold bull market to continue in the longer run, gold first has to decouple from other assets and re-establish it’s safe haven role, i.e. its positive correlation with risk. Only then will it resume its true bull market, independently from paper assets.


Source: www.economicreason.com

[Guest]

Re: Gold: from safe haven to speculative asset

Hi Ostap,

I follow the James Dines "Dines Letter" among a bunch of other "old timer"newsletters - continually published since 1960. I'm told Mr. Dines "wrote the book" on certain parts of technical analysis in the 1960's.

Contrarian to all the nervous Nellies on gold, he's actually suggesting the precious metals may be an good thing to be piling into even more right now (or very soon) as recent treasury sales are failing miserably and the long expected "run on the dollar" looms closer. I know - many technical analysis guys say the charts look terrible ... but (??)

Here's a great example of where, in a time of great flux and uncertainty, someone who is making seemingly flat footed statements of the obvious may often be overlooked. The fact the guy making those apparently flat-footed statements is Jim Dines - who called the major turns of the gold bull market of the 1970's - well this is a real eye opener for "flat-footed market calls".

I am wretched in economic literacy, but I do think dumping precious metals to try to second guess or "dodge" the occurrence of KA is a mistake. I'm overweight PM's and I'm not going to sell a single ounce.

Why not just keep a good chunk of cash and pile in for more if they get knocked down 20%. No fears, mate - this is not stock market paper we are overweighting, it's the best cash equivalent out there. This is the fundamental distinction about not trading in and out of PM's.

A lot of people are going to be scratching their heads not too far from now wondering where the "real cash" is, and unsure if "what they went to cash in" is the real deal.

This is the "no-fooling-around" bet to be positioned in for the next five years. And here's the thing, if one is only nibbling at the edges, and one doubts the thesis to begin with, why then bother with it at all? Got doubts about precious metals? Walk away entirely!

Losing their inverse behavior relative to VIX in no way clarifies or assures that precious metals would inevitably follow stocks down. If gold's downturn only lasted 2 months and bounced down and up 30% in a general crash, would it even qualify as a downturn?

There is way too much technical reading of tealeaves using this broken VIX correlation to call the fundamentals changed. This material (bullion) is the antithesis of all leverage and debt. Most people here agree leverage and debt are a runaway train preparing to climb off the rails.

Precious metals, in plain bullion form, promise to remain comparatively more cashlike than all the paper cash in the world. Therefore to get uneasy about it because it pays no interest or dividends may be missing the point?. If one intends to "go to cash", why would one be looking at paper?

I wonder about all those looking to dump precious metals (I mean bullion, not stocks) in order to "duck" the KA event - if we are all so convinced gold is going to $1650 or $2000 (or more), why do we even think of bailing out in fear of a 25% correction, during the feared KA?

Have not many of us held far riskier paper share certificates through 20% corrections with an eye firmly on the far side of that event? If so, holding metal through 20% downturns should be incomparably safer in the global flood of liquidity that will confront a global slowdown. It comes sooner, or it comes later, but it's eventual arrival is very high probability.

Does anyone really believe central banks will suddenly embark on a saintly program of liquidity withdrawal? Anyone who advises me the dollar will soar, for one (to me indecipherable) calculation or another will have me firmly wary of allowing their idea to influence my investment stance.

A believer of the benefits of getting parked in "the hard stuff" will take his position and just sit on it for a five or seven years, until the top is obviously in, no? Worst case, you don't lose any money in real terms.

If one does not think gold is an argument with any reliable merit, then one should just forget about it and walk away, without constantly worrying whether to be in or out of it.

Cheers.