Gold Price Update: It’s All about Trust

Gold Price Update: It’s All about Trust

Today, the gold price in AUD terms is holding steady at $2,630.

In this piece we talk about an ethereal term — ‘trust’ and the three recent periods of positive correlation between the ASX 200 [XJO] and the gold price.

Markets are delicately poised at the moment, and something strange is happening when you match up the gold price in AUD terms with the ASX 200.

Bets on gold and ASX 200 [XJO] both paid off, but something strange is afoot

Have a quick look at this chart, which dates back to the 2009 GFC low:

Gold trading view

Source: tradingview.com

This is how it reads.

So, if you had bought and ounce of gold in Australia and an ASX 200 ETF in November 2008, you would be up around 100% and 43% respectively.

Just 43%. Not only is that a paltry return in comparison, it’s could be seen as a lot of risk and emotional stress for the rollercoaster that is being in the big equities.

Back to the chart.

As you can see, the XJO and the gold price in AUD terms were largely negatively correlated between November 2008 and the end of 2014/start of 2015.

But then something strange happened.

From the start of 2015m the two were positively correlated and then weakly negatively correlated.

We have since seen two strong spikes in positive correlation.

This is odd.

The general view is that if markets are down, gold is up.

The natural order you could call it.

Safe havens etc.

Market expert Shae Russell predicts five knock-on effects of the recent market crash that could be even bigger threats to the average investor’s wealth than the crash itself.

Old markets down gold up thesis might not hold

But since 2015, the thesis hasn’t exactly played out that way.

Granted, the March low has seen the gap between the two open up again, and another two months on the chart could see a return to normal service.

At least as far as the correlation coefficient goes. Hint: Gold may go up further and markets down further.

But what all this points to, is above all else, a decay of trust in the financial system.

ETFs have made up for significant short-fall in jewellery demand as you can see below:

ETF inflows

Source: ainsliewealth.com.au

The market thus seems to have done a paradoxical thing since 2015.

Big bets that the bull run for equities will continue, in concert with big bets on gold. Not always at the same time, but the old thesis that markets returning to normal will herald gold’s demise doesn’t seem to hold the same sway.

Indeed, the fact that the gold price has held steady while the ASX has entered a technical bull market from the March lows, shows how much trust (or precisely how much distrust) is out there.

If you want the five-step process that could drive gold price fundamentals in the next few years, read this. It’s an in-depth look at what’s happening behind the scenes in the monetary system. If you haven’t heard of techno-monetary competition, it’s a must read. You can download the report here.

Regards,

Lachlann Tierney,

For The Daily Reckoning Australia