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Gold is showing its true colors as the ultimate safe
haven asset. Gold has been trading at all-time highs as national economies in
the European Monetary Union teeter on bankruptcy, threatening the legitimacy
of the Euro as a legitimate currency. Adding to global economic uncertainty
is the US debt crisis, which has forced the major credit rating agencies to
place US sovereign debt on negative credit watch for potential downgrade.
It seems inconceivable that the US would lose its
AAA credit rating. US Treasurys have been
considered the riskless asset compared to all others. That is, the
probability that the United States would default on its debt has been
considered zero, up until now. Moody’s has stated that the chances of
US default in the next 90 days are 50-50. That’s a long way down from
“riskless”.
The US Dollar and US Treasurys
have been traditional safe-haven assets. US Dollar denominated assets surge
in price when investors sell risky assets such as stocks and high-yield bonds
in the so called “risk-off” trade. We saw the Dollar climb at the
height of the global financial crisis, right after Lehman Brother’s bankruptcy
in September 2008. US Treasurys also surged. In
January 2011, the Arab Spring followed by the Libyan oil shock in February
put pressure on the Dollar as commodity prices, led by oil, spiked. Also in
January, fears of a Euro-zone debt crisis began to take hold. Investors piled
into gold, in a flight to safety, driving the price above $1400/oz.
 
Traditionally,
the Dollar and gold are negatively correlated, which is to say gold prices tend
to rise as the Dollar declines, and vice versa. We have seen gold prices,
measured in Dollars, rise steadily since 2009. Over the same period, the US
Dollar has seen an overall decline. This is not to say that one caused the
other. Contrary to popular belief, correlation is not causation. The US
Dollar has declined in value primarily due to Fed increases in the money
supply. Gold prices have increased because there are more buyers than
sellers. The price of gold is a good measure of economic uncertainty.
Another measure of investor sentiment (fear or
uncertainty) is the CBOE Volatility Index, or VIX. It measures market
expectations of near-term market volatility conveyed by S&P 500 stock
index option prices. Since its introduction in 1993, VIX has been considered
by many to be a reliable barometer of investor sentiment and stock market
volatility.
We can see in the chart above that the VIX and the
S&P 500 are negatively correlated. Stocks tend to fall when the VIX
rises. This makes sense. When investors expect the markets to be volatile,
fear of losses drives them to sell. Of course, for most investors, selling
begets more selling. Many flee to US Treasurys,
considered the safe trade.
But that relationship is now breaking down. Today,
stocks are selling off; the Dow is down more than 150 points and S&P500
is down 1.3% to below 1300. Price action in the VIX predicted the sell-off by
moving up from 16 on July 11 to 21.78 today. The Dollar index, however, is
trading slightly lower than the last week’s levels (75.85 vs 76.31) and, the 10-Year Treasury is trading at the
same level as nearly a month ago. So proceeds from the stock sell-off are not
flooding into US Dollar denominated assets.
Instead, funds are flooding into gold and gold
stocks. COMEX gold has broken through $1600/oz, and
the gold mining stocks are breaking higher. The NYSE Arca
gold BUGS index (HUI) is up 17% over the last 30 days. The Philadelphia
Gold/Silver index is up 11% for the same period.
Clearly the ‘safe-haven’ asset is gold.
Right now the flight to safety is away from stocks and away from the Dollar
and Treasurys and into gold and gold stocks.
Subscribers to The
Gold Speculator have owned gold and silver (metals and mining stocks)
since early in 2010. Specific portfolio recommendations produced 66% profit
in 2010 and gains of 40.5% year-to-date for 2011. In comparison, the Dow is
up 7.10% year-to date, and the S&P 500 is up 4.09% year-to-date.
Investors from
around the world benefit from timely market analysis on gold and silver and
portfolio recommendations contained in The
Gold Speculator investment newsletter, which is based on the principles
of free markets, private property, sound money and Austrian School economics.
The question for you to consider is how are you
going to protect yourself from the vagaries of the fiat money and economic
uncertainty? We publish The Gold
Speculator to help people make better decisions about their money. Our
Model Conservative Portfolio gained 66.7% in 2010, and 55% for 1Q2011.
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Scott Silva
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