Here’s Why It’s Too Early For A Gold Bottom

December 07, 2016

Hear from Matt Hougan and more than 120 speakers at Inside ETFs 2017, which runs Jan. 22-25 in Hollywood, FL. See the agenda and register here now for the world’s largest ETF conference.

It’s that time of year when I start combing through the agenda for the upcoming Inside ETFs conference to figure out which panels and presentations I want to make sure I don’t miss. Today I noticed a dedicated panel on gold and silver investing, and I scratched my head a bit.

Gold? Seriously?

If there’s one asset class that’s been hammered by the Trump election, it’s gold. As I write this, gold has declined 10.5% nearly in a straight line. On the surface, this is just simple risk-on selling—the S&P 500 is up over 6% in the same period, and all that equity-chasing money had to come from somewhere.

But what about gold’s traditional roles as inflation hedge, reserve currency, safety asset and counter-correlated diversifier?

I’m fascinated by gold because it’s the only important financial asset in the world that’s basically fictitious. It’s a pure commodity of psychology. It has worth because everyone says it does, and its relative value versus other things is only based on belief.

In that way, it’s much like technical analysis. There’s no more magic to a line on a chart than there is to an ounce of the yellow metal, and yet both are important and meaningful precisely because enough people believe they’re meaningful.

The Correlation Factor

There are a few ways I generally look at how investors are feeling about gold beyond just the simple “they sold it so it’s down” analysis. The first is correlations. For many investors, including a small slug of gold in a portfolio is a way to have a hedge for bad times. But that’s only helpful if in fact gold moves the opposite direction of other major asset classes. So how’s that working out?

 

 

The top line here is the price of the SPDR Gold Trust (GLD); the bottom line is the 40-day rolling correlation to the S&P 500. The good news for the correlation story is that other than a little blip this fall, for the most part, gold has remained a counter-correlated asset, more so in the past few years than during the big bull-run on gold since the financial crisis. So that’s one positive for the gold investment case.

 

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