Gold Market: Correlation Breakdowns Doesn't Bode Well For Prices - ANG Traders
(Kitco News)- Correlations breakdowns between gold and critical financialmarkets could be a troubling signal for the yellow metal, which has seen astrong start to the new year, according to one trading firm.
In a research note published on Seeking Alpha Tuesday,analysts at ANG Traders said that they had noticed a breakdown in gold’scorrelation to inflation expectations, and its negative relationship totreasury yields. At the same time, the yellow metal has managed to maintain itsnegative correlation against the U.S. dollar index. The analysts raisedconcerns about a growing positive correlation between gold and the currencypair USD/JYP; however, that appears to be resolving as the Yen is gainingagainst the U.S. dollar as the yellow metal holds near 3.5-month highs.
“Gold is displaying odd behavior in three of the four correlatedmarkets, and because the bias in rates is to the upside, inflation expectationswill remain contained, making the balance of probabilities point to futureweakness in gold,” they said in the report.
Probably the most unsustainable breakdown, according to ANG,is a stronger gold price in the face of higher bond yields. The assets have ahigh negative correlation as higher bond yields increase gold’s opportunitycosts.
ANG noted that since the beginning of December thecorrelation has turned positive. The positive correlation was on displayWednesday as 10-year bond yields jump nearly 10 basis points during the tradingsession to 2.57%, its highest level since mid-March. At the same time, goldcontinues most of its gains since the start of the year, last trading at$1,319.80 an ounce.
“A reversion to the mean is almost guaranteed,” the analystssaid. “This means that either gold drops in price as rates continue to rise, orrates drop and gold continues to rise. We think this odd behavior is more likelyto resolve itself by gold dropping in price since the bias in rates isdefinitely to the upside.”
Looking at inflation pressures, which is positivelycorrelated to gold, ANG said that this relationship has now turned negative forthe first time since mid-2016.
“In 2016, the negative correlation signaled the start of a15% slide in the gold price,” the analysts said. “Also, rising rates are likelyto keep inflation expectations contained and gold under increased pressure,like in the second half of 2016.”
Finally, the only relationship that remains in sync with goldis its negative correlation with the U.S. dollar. The analysts noted that thisdoes not bode well as the U.S. Dollar Index appears to be regaining momentumafter a dismal end to 2017.
“Thedollar may be about to rally, and if the negative correlation holds, then goldwill give back most or all of its December price appreciation,” they said.
By Neils ChristensenFor Kitco News
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