A look at gold, and with no references to the Olympics.
The past two months have been the most stable for gold for 18 months, looking at the price variation. This is even more remarkable given the flow of dire news on the global economy over this time, such as the eurozone sovereign crisis along with expectations of slower growth in China and other emerging markets.
Gold is another example of the dislocation from previous relationships we are seeing in markets. For most of the past four years gold has traded inversely with global real interest rates. So if real rates (interest rates minus inflation) fell, gold rose. If investors were not being rewarded over and above inflation elsewhere (or were being rewarded but less so than before), they have been more inclined historically to seek returns from a non-yielding asset such as gold. So, having seen a correlation of -0.60 through last year (on a six-month rolling basis), gold and real interest rates (we use a simple global measure) are now positively correlated to the same extent.
Of course, bullish arguments for gold are never hard to come by and they are still being thrown around. But similar to the way in which the Aussie has diverged from previously strong relationships with the global risk cycle and commodities, gold is also behaving differently compared to the past few years. If finance teaches us anything it’s that nothing lasts forever, and this should hold true for gold just the same as any other asset. This could still turn out to be gold’s first down year since 2001.