One of the biggest stories in markets right now is the weakness in gold, which got crushed yesterday, and which has been weak in spite of new heights in central bank easing.
You can see how bad things have been since early October here, via FinViz.
[credit provider=”FinViz” url=”http://finviz.com/futures_charts.ashx?t=GC&p=d1″]
The chart for silver is even uglier.
Trader Mark Dow has a great explanation of what’s going on that’s new. Essentially, there’s been a correlation breakdown. Whereas formerly, gold was going up along with stocks, now gold is getting whacked, as stocks push towards post-crisis highs.
Furthermore, there’s been an increase in real interest rates (bad for gold) and some investors that have been uber-long gold this year, are probably getting freaked out, hitting the bid, and bracing for redemptions.
This is all new stuff, and thus one of the most crowded, most popular, and most poorly understood trades of the last few years is getting ugly in its reversal.
Despite all the talk about safe haven status in recent years, precious metals have had a strong positive correlation with stocks and risky assets more generally. Their correlation with the dollar, of course, has been strongly negative. Less intuitively, the impulse correlation of precious metals to treasury yields has been positive, even though low levels of yield (more precisely, real rates) is an important driver of higher PM prices.
These correlations have flipped in the last few days in a way that is apparent to everyone. The decline in gold and silver in the face of a strong bid to risky assets will now likely force people to reconsider their investment hypothesis for holding them. Big events and correlations that change signs often do. Specifically, a lot of big macro tourists hold large PM positions, and what I believe we are seeing is some of them starting to hit the bid. It is also possible that some of them are also facing redemptions, since those clinging hardest to their PM positions are also those most likely to have been working under the wrong economic assumptions and underperforming all year. So, the year-end dynamic may be exacerbating the pressure we are currently seeing