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9 Apr 2013
Forex Flash: Gold and S&P 500 correlations break down - BBH
FXstreet.com (Barcelona) - Marc Chandler, Global Head of Currency Strategy at Brown Brothers Harriman notes that the correlation between Gold and the S&P 500 have broken down.
Chandler begins by noting that the unorthodox easing by the major central banks and the initial attempt to bail in insured depositors was widely thought to underpin the gold prices. Further, the price of gold is off about 9.5% this year in dollar terms. Indeed, it has been trending lower since early October's test on $1800 an ounce. In contrast, he notes that the S&P 500 has been trending higher since the last correction ended in mid-November and has moved within spitting distance of the October 07 record high of 1576. Hence, the correlation between the two has broken down and on a 60-day basis the correlation is slightly negative now, while the 90-day correlation is barely above zero.
He sees that when the correlation between gold and the S&P 500 is the strongest, the more gold is trading like an asset. When the correlation is inverse, gold is arguably acting like a safe haven. He writes, “Since the financial crisis began the 60- and 90-day correlations have mostly been positive, but nearly every year there is a period of inverse correlations. Last year was an exception for the 90-day correlation, which never became inverse.” Chandler comments that the longest inversion since the crisis began was from April through November 2008 when the 90-day correlation reached just beyond -0.5. From late-1998 through 2003, the 90-day correlation was rarely positive. He believes that the weak correlation between gold and the S&P 500 suggests that gold acting more like safe haven now than at time since last June. He finishes by writing, “The problem for gold bulls seems to be that the liquidity being provided by the major central banks, or anticipated, means that investors are being forced out of save havens.”
Chandler begins by noting that the unorthodox easing by the major central banks and the initial attempt to bail in insured depositors was widely thought to underpin the gold prices. Further, the price of gold is off about 9.5% this year in dollar terms. Indeed, it has been trending lower since early October's test on $1800 an ounce. In contrast, he notes that the S&P 500 has been trending higher since the last correction ended in mid-November and has moved within spitting distance of the October 07 record high of 1576. Hence, the correlation between the two has broken down and on a 60-day basis the correlation is slightly negative now, while the 90-day correlation is barely above zero.
He sees that when the correlation between gold and the S&P 500 is the strongest, the more gold is trading like an asset. When the correlation is inverse, gold is arguably acting like a safe haven. He writes, “Since the financial crisis began the 60- and 90-day correlations have mostly been positive, but nearly every year there is a period of inverse correlations. Last year was an exception for the 90-day correlation, which never became inverse.” Chandler comments that the longest inversion since the crisis began was from April through November 2008 when the 90-day correlation reached just beyond -0.5. From late-1998 through 2003, the 90-day correlation was rarely positive. He believes that the weak correlation between gold and the S&P 500 suggests that gold acting more like safe haven now than at time since last June. He finishes by writing, “The problem for gold bulls seems to be that the liquidity being provided by the major central banks, or anticipated, means that investors are being forced out of save havens.”