Gold has been unable to keep up with the risk-off mood, is that normal?
One of the more puzzling things in the market this week is gold and its inability to shine despite the fact that we're seeing equities tumble and risk selloff, with bonds also heavily bid (US Treasury yields touching record lows for that matter).
The divergence is even more startling today as gold is trading down by over 1% now:
So, what's the problem with gold in trading this week? Why isn't it skyrocketing higher?
One theory is that the move from $1,600 to just above $1,680 was a case of going 'too far, too fast'. Hence, a needed pullback and breather after the breakout.
But surely gold would be moving just a little more considering the scale of the moves we are seeing in the market this week regardless, no?
That brings us to the second theory and perhaps the more worrying one. One of the reasons why investors sell gold in heavy volumes is if they have a need for high liquidity.
There is quite a bit of talk in the market about funds and big players needing to sell gold to hedge and balance out their portfolio losses from equities. In other words, they are doing so to avoid margin calls or risk getting drowned out by the market selloff.
A Bloomberg opinion piece also pointed out an interesting comment from ABN Amro today:
"When risk aversion turns into market panic, the dollar, yen and US Treasuries are the assets sought after. I expect gold to drop in that environment because investment in gold is liquidated for cash."
It sort of makes sense when you put the pieces together. That said, gold may be underperforming now as the portfolio plays are taking place but eventually, in times of a real crisis, it is hard to fight the growing demand and allure for bullion.
Regardless of what you believe in, you can't argue with what the chart and price action says. For now, it isn't the time to jump on the gold bull just yet but I'd be wary of a break above $1,660 as that could be the trigger for a springboard higher in gold.
