Gold is the New Long Term Treasury?

[Gumby]

I rarely look at the value of my overall PP, but most days I'll peak at the intraday asset comparisons using my favorite bookmark:

http://google.com/finance/chart?cht=c&q ... hy&tlf=12h

One quick look at that link and I can get a pretty good indicator of what's happening in the PP world without having to look at my performance. And frankly, the intraday asset comparisons are more interesting than simply seeing my slow and steady PP return.

Here's what the assets do on a typical day where stocks go down (Colors: VTI, GLD, TLT, SHY) ...

[align=center][/align]

On days where stocks go up, you often see the opposite happen (with LTTs still moving inversely to stocks). It doesn't happen every day, but that's what typically happens on days with high volatility. When there are long periods of high volatility in the markets, VTI and TLT typically mirror each other, like this:

[align=center][/align]

This makes sense since LTTs are typically seen as a safe haven.

But something odd has happened over the last few days. Gold seems to moving inversely to stocks — a role typically exhibited by Long Term Treasuries! And, Long Term Treasuries are now floating along without much negative correlation to stocks. It's like they've switched roles. Here's what's happening right now...

[align=center][/align]

It's fascinating. A few months ago, we would have seen Long Term Treasuries moving inversely to stocks. Now we see gold moving inversely to stocks at times.

It seems that we are witnessing another layer of PP protection, where gold takes over the role of Long Term Treasuries in extreme situations.

[hogtied]

I've recognized this trend also.  Perhaps someday down the "kicking can road" our ancestors will be:  25% cash, 25% stock and 50% gold.  Maybe when the dollar looses it's reserve status and treasuries flounder for extended decades.

[tjt]

Do you think this could be due to the devaluation of the dollar?

[Gumby]

Do you think this could be due to the devaluation of the dollar?

I think it's just a sign of intense fear in the markets. It's a sign that "normal" asset correlations are breaking down — which isn't exactly a good omen for the economy. I suppose 2008 was the last time that really happened.

There was a huge selloff in gold this morning. That selloff could have been for any number of reasons. One theory for the large drop is that some high-level investors who are close to the Fed got wind that QE3 isn't being announced at Jackson Hole tomorrow. If QE3 were being announced, stocks, gold and commodities should all be surging in anticipation. Of course, it's still possible that QE3 will be announced at Jackson Hole tomorrow, but the markets aren't currently acting like it's happening. It just looks like intense fear to me.

In any case, after gold's large drop it resumed that strange inverse correlation with stocks. LTTs seem to be slightly adrift.

Here's today's intraday chart so far:

[align=center]
(VTI, GLD, TLT)[/align]

[moda0306]

Is that correlation really that strange, historically?

I mean the last few years it's correlated, yes, but overall since 1972 stocks/gold have had much less correlation than LTT's, overall.

That said, I'd expect the stock/LTT zig zag to continue for years to come, with gold kind of doing its own thing.

[Gumby]

Is that correlation really that strange, historically?

I'm not sure. Have you seen this inverse correlation between stocks and gold before, where LTTs seem adrift? I bet this only happens during periods of intense fear in the markets — perhaps back in 1979. I just don't know.

[moda0306]

The 70's were bullish for gold and all over the place for stocks, creating an initial lack of correlation.

1982-2000 was extremely bullish for stocks and bearish for gold.  One could see almost 13 years straight of gold losses while stocks & bonds (together) were doing the opposite.

[Gumby]

The 70's were bullish for gold and all over the place for stocks, creating an initial lack of correlation.

1982-2000 was extremely bullish for stocks and bearish for gold.  One could see almost 13 years straight of gold losses while stocks & bonds (together) were doing the opposite.

Ah... right. But, I was talking about a direct minute-to-minute inverse correlation. But, you're right. That probably did happen quite a bit during those years. We certainly haven't seen it in awhile.

Maybe this is what happens when gold has hit a (short term) peak?  ???

[moda0306]

Yes... this gold & LTT's doing well at the same time aspect of the last decade is one that's sure to keep us second-guessing our PP correlations and wondering about whether or not it will continue to work in the future.

It boggles my mind that someone could buy stock in a productive company in 1972, and another person could buy a shiny yellow metal, and after 40 years they'd both be sitting on pretty close to the same amount of wealth.

That said, I don't think gold will do some massive drop... I think it will probably do another 1980's-2000-style year-after-year fall-back, as people slowly start to forget about it. 

[clacy]

I'm certainly not surprised with Gold's correction.  It couldn't keep blazing further and further from it's moving averages forever.  I think the likely catalyst is the speculation that the Fed will not be able to announce much in the way of QE3 this week.

With that said, until real interest rates raise, I'm not betting against gold long term.

[Gumby]

Word on the street is that leaked news of a series of large upcoming gold margin hikes caused the recent pullback. Likely a temporary setback. As they say...what other solutions are there for central banks that don't involve devaluing paper money?