By Michael A. Gayed at Marketwatch
I know, I know. Gold is a controversial metal. Some people hate it as an investment because it provides no income, and is a “relic of the past.” Some people love it, arguing it is the safest form of currency in the world with historical relevance. Others simply like how shiny it is.
For market participants, it is important to be dispassionate about any one asset class or strategy and look at how one area of the market may impact another. This is at the core of inter-market analysis — try to see if there is a signal in the price movement of non-broad market investments that is initially ignored by bulls and bears, allowing for an exploitable opportunity as information diffuses with a lag to equity traders.
“I like facts and data because they help me think clearly, beyond the cultural messages that I ingest unwittingly, and sometimes find myself regurgitating almost unconsciously.”
So let us look at gold not from an emotional side, but rather from a signaling one. In the 2015 NAAIM Wagner award-winning paper I co-authored titled “Lumber: Worth Its Weight in Gold” (click here to download), we document the signal that gold relative to lumber has on equity and bond markets. Why do we compare gold’s relative performance to lumber? Because Lumber is the commodity most sensitive housing, and as such, most reactive to changing growth and inflation expectations.
Gold, on the other hand, is completely non-cyclical and uncorrelated to growth, inflation and most macroeconomic variables. The precious metal tends to move off of stock-market implied volatility, consistent with the notion that in times of market stress, money buys into the commodity.
Generally, when gold is outperforming lumber, stock-market volatility tends to rise and drawdown risk increases.
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