Gold Losing Its Luster
by David I. Templeton, CFASummary
- One reason for owning gold is it tends to serve as a safe haven asset and performs well in an environment where economic activity is slowing.
- On the other hand, investors might look to copper as an investment if they expect a pickup in economic activity as it tends to rise with a growing economy.
- With the yield curve no longer inverted and recent economic reports suggesting improving economic conditions, safe haven assets like gold likely lag the more economically sensitive ones, copper in this case.
There can be a number of reasons for an investor wanting to have an allocation to gold. One reason for owning gold is it tends to serve as a safe haven asset and performs well in an environment where economic activity is slowing. On the other hand, investors might look to copper as an investment if they expect a pickup in economic activity as it tends to rise with a growing economy.
As noted in a recent article by John Murphy, who writes for StockCharts.com, John highlights the recent diverging trends in the price of gold and copper. This divergence began to develop in September with gold prices declining while copper prices have been on the rise.
What also tends to occur with an economy that is expanding is interest rates begin to rise. The following chart displays a ratio of copper and gold (red line) along with the yield on the 10-year Treasury. Just as gold began to decline and copper began to rise in September, the yield on the 10-year Treasury began to turn higher as well (green line.) With gold being a safe haven, non-yielding asset, as interest rates rise, the move higher in interest rates is a headwind for gold prices too. The bottom portion of the below chart displays the correlation of the copper/gold ratio to the 10-year Treasury yield. A correlation of 1.0 signifies a perfect correlation and the correlation reading has trended between 1.0 and .75 since September.
With the yield curve no longer inverted and recent economic reports suggesting improving economic conditions, safe haven assets like gold likely lag the more economically sensitive ones, copper in this case. Not being a gold bug myself, I do believe the global economy has bottomed and a faster pace of economic growth lies ahead. Very few things move higher in a straight line so volatility should be expected as the new year fast approaches.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.