Fueled by global uncertainty, the resurgence of gold has been one of the biggest themes this year. To identify emerging themes, we look at phase transition signals. Changing correlations, as we saw between Chinese equities and Gold in January are a good example. Fig. 1 below shows how Gold became a favored flight to safety asset for Chinese equities investors in January as correlation turned negative.
Fig. 1. Gold correlation to Chinese equities turns negative in January
Chinese stocks ($FXI) remain the most negatively correlated stock market with gold, and yet the relationship is weakening.
As for global investors, we can see that more reliable flight to safety assets are US government bonds and JPY, which both show much more persistent negative correlation to risk assets than gold. Global investors prefer US government bonds as safe haven, as we can see by the strong negative correlation to US Financials ($XLF) in Fig. 2. below (currently at -.66).
Fig. 2. US government bond 20Y+ correlation with US Financials
It’s too early to tell whether the gold’s bubble is ready to burst, but monitoring correlations to equities will be key. The less negative its correlation becomes with equities, the less attractive it will be as a safe haven, as discussed the video below.
Video: Gold losing allure as a safe haven asset?
What do you think? Looking forward to your thoughts.