Liquidity is back… so is gold
Posted on 17. fév, 2012 by Riskelia in Weekly Focus | Commentaires fermés
Gold has come back to the forefront among the Radar recommendations. The correlation between gold and platinum has increased over time to a correlation approaching 0.8, but interestingly, gold is the commodity which is the least related to S&P 500, even if its correlation to the index has risen back in positive territory in the last three months (figure 2).
Figure 3 represents the situation of financial assets in a two-dimensional plane (the x axis representing the Risk Off / Risk On paradigm while the y axis characterizes a relative bet of equities vs. other assets). Gold is logically not far from inflation bonds since the ever increasing supply of fiat money to insolvent banks and states has failed to revive real growth prospects and has only served to avert a full-fledged deflation so far. Nevertheless, the gold has had a behavior closer to equities since the concerted decision of central banks to provide liquidity in dollar and the 3 years unlimited liquidity to European banks granted by the ECB.
For sure, gold remains positively related to oil and inversely correlated to the dollar. The strongest explanatory factors outside the precious metals complex are Brent, AUD, NOK and CHF (figures 4-5): the oil brent now serves as a hedge against geopolitical risk and currency debasement while the currencies of countries with solid budget situation and/or strategic commodity reserves (AUD, NOK and CHF) appear as alternatives to traditional reserve currencies.
The gold recommendation is surging back to positive territory against every currency as showed in figure 6. In contrast with summer 2011, where gold served as a protection against deflation, it is now closely linked to liquidity prospects judging by the negative equity tail dependence of Gold in USD (which represents the average gold price move in numbers of standard deviations when equities returns are below their 10% quantile on a rolling window of 100 days). Therefore, gold is now a bet on the pursuit of unproductive liquidity injections by the Fed and the ECB artificially supporting the price of risky assets in nominal terms but not in real terms vs. gold.
Figure 1: Gold correlations within the precious metals constellation
Figure 2: Commodities 250 days rolling correlation with the S&P 500
Figure 3: Gold positioning within the « risk on/risk off » framework. All asset classes are positioned according to their correlations with the first two factors of a principal component analysis on asset returns.
Since January 2011
Since November 2011: the transition of gold towards the equities
Figure 4: Gold explanatory factors beyond the precious metals constellation. The numbers represent the correlations between daily price returns. The arrows pointing to gold are the markets explaining gold returns.
Figure 5: Assets explained by gold beyond the precious metals constellation. The numbers represent the correlations between daily price returns. The arrows coming out of gold are the markets explained by gold returns.
Figure 6: Gold recommendations vs. every currency
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