What's the matter with gold?
Singapore Sales Trader
Gold’s value lies in its negative correlation to equities. It is meant to be an anchor in volatile times, a priceless hedge in a crisis and an underperformer in boom times. Take 2002, for instance, when SPX was down more than 23% for the year: gold’s return for the year was 24.77%, a differential return of 48.14%. In 2008, the differential return was 44.28%.
Even after the Federal Reserve’s launch of QE in late 2008, gold continued to outperform the liquidity-induced bull run in equities as the fear of excess liquidity eventually resulting in steep inflation kept the demand for the precious metal high. It is only after the third round of QE was announced that equities started outperforming gold in 2012, although gold was still trading firmer.
What seems to have changed the equation dramatically is what was popularly referred to as then-Fed chair Ben Bernanke’s May 2013 ‘taper tantrum’. In his testimony to Congress, Bernanke announced that the Fed would no longer be purchasing bonds and mass global panic ensued. The Fed duly backtracked on the taper as it feared undoing the painfully accumulated economic recovery. Since then, the question of a ‘Fed put’ being around the corner on every sign of volatility has been met with resounding reassurances as central banks remained ultra-cautious, taking the tiniest of baby steps toward normalising monetary policy in the wake of the QE era. The latest flip-flop from the Powell Fed is just another instance of market moves dictating policy.