Gold’s parabolic rise this year was a classic fear trade, driven by plunging global markets in January. Gold’s protective negative market correlation was especially strong as Chinese & Japanese equities fell. However, as we first highlighted in our March 9 post, Is Gold Losing Its Allure As A Flight To Safety Asset?, gold’s protective relationship has started to waver. Fig. 1 shows that Gold’s correlation to Japanese equities has weakened from -.63 to -.27 in March, making it a less reliable safe haven.
Fig. 1. Gold vs Japanese equities correlation
Fig. 1 also shows that gold is still negatively correlated to many equity markets (red links), although its negative correlation is now insignificant against MSCI Asia & Europe (red dashed lines).
The most reliable global safe haven asset continue to be US Government bonds ($TLT), followed by Japanese Yen. Both continue to show stable negative equity correlation in excess of -.6. Fig 2. shows that the US Gov’t 20+ bonds vs. Italian equities correlation has remained negative since the 29 June 2015 Flash Crash and currently stands at -.63 (we use the standard RiskMetrics .94 decay to calculate correlations).
Fig. 2. US Government Bonds vs Italian equities correlation
Finally, Gold’s persistent high volatility and strong link to Gold Miners and Silver is also dangerous. Indeed, we’ve recently observed an increase in negative surprises for commodity linked assets. On 23 March, the plunge in Silver, Gold Miners and Gold ranked as top outliers in our Cross Asset FNA Correlations dashboard. We discuss these outliers and recent correlation dynamics in the 4 minute video below.
Video: Gold losing luster as safe haven (4 min)
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