Is Gold rolling over? - BBH

Research Team at BBH, notes that the price of gold peaked this year in early July near $1375.50 while the August high was $1367.7 and the September high was $1352.8 while a trendline drawn off the highs marks the technical cap.  

Key Quotes

“It finishes this month a little above $1343.0.  The trendline intersects near $1331.4 at the end of October.

Gold sometimes acts as a safe haven asset. Many investors are concerned that the unorthodox monetary policies being pursued by a number of central banks, and the continued low policy setting in the US debases paper money.    At the same time, the low interest rates also makes the opportunity cost (yield foregone) of holding gold less.  

However, sometimes gold is just another asset and acts like other commodities.   That seems to be what is happening now.  Specifically, we looked at the correlation of gold and the S&P 500.  As investors, we are most interested in the correlation of the return of gold and the S&P 500.  We ran the correlation on the percentage change of the two on a rolling 60-day basis.  

We bring to your attention the fact that over the past week the correlation has turned positive for the first time since the very start of the year.  The positive correlation is not statistically significant.  However, what is important for investors is the change of direction of the correlation.   Separately, our work also slows that the correlation between the change in US 10-year-US yields and the S&P 500 has also changed signs.  It had been positive since the Q2 15, and was as high as 0.6 as recently as the end of August.  The correlation is now negative.  Here too the correlation is not significant, but it is the change of signs that grads our attention.  

The change in inter-market relationships is a warning sign to investors.  The full implications may not be clear.  It is difficult, for example, to tease out market direction from the shift in correlations.   If gold, for example, holds above $1300-$1310, the technical pressure may be alleviated through broad sideways movement.  Similarly, the S&P 500 held important support near 2115 in the middle of September and a break of it is needed to signify anything important on the downside.  

A benign interpretation of the shift in correlations is the choppy but broadly sideways active.  A more significant implication is that the market drivers are shifting.  The price action in the coming weeks will help determine which scenario is more likely.”