In a year when investors have been caught off guard by everything from emerging-market woes and the dollar’s tailwind to a brewing trade war, gold has been a conspicuous head-scratcher.
Why, investors ask, has the yellow metal tumbled as economic and geopolitical risks pile up?
Whether you blame it on ideology or the wretched complexity of global finance, the rules of thumb that govern gold investing are wide of the mark all-too-often. Busting five bullion myths right now could be key to understanding the current slide.
Myth 1: U.S. rates drive gold
The received wisdom is that when inflation-adjusted yields rise, assets bereft of income streams like gold tend to suffer given the opportunity cost.
But that’s not what is behind the current slump.
The argument hasn’t rung true for a while now, in fact. There’s very little correlation between the metal and 10-year inflation-linked Treasuries, coming in at -0.2 on a rolling 120-day basis. And just look at what happens when the Fed raises rates.
The key driver of gold, in fact, is the dollar. Few assets have a stronger inverse correlation to the Bloomberg Dollar Spot Index. The 120-day rolling measure stands at -0.6, indicating that the metal and currency typically moves in opposite direction. Other assets priced in dollars, particularly commodities, also have inverse correlations by construction -- but gold is by far the strongest.
Myth 2: The precious metal is the anti-Dow
As an asset seen benefiting from haven demand, bullion goes up when stocks go down, right?