Why Doesn’t Gold Glitter These Days?

The following graph shows the relationship between the SPDR Gold Shares ETF (GLD) and the iShares TIPS Bond ETF (TIP). The TIP ETF holds US Treasury obligations that are protected against inflation.TIP performs better when inflationary expectations increase the demand for those obligations. I chose those two instruments because they are easily comparable, with standardized units both priced in US dollars. We can see that while the two instruments moved largely in tandem over the past two years, TIP has outperformed GLD since the November election.

Two Year Chart of GLD (white) vs. TIP (orange) with 100 Day Percentage Correlation

(Click on image to enlarge)

Two Year Chart of GLD (white) vs. TIP (orange) with 100 Day Percentage Correlation

Source: Bloomberg

The lower portion of the graph shows the correlation of daily percentage moves over the prior rolling 100 day period. We can see that prior to the Covid-related panic of a year ago, they correlated quite well. The readings were in the 0.60-0.70 range, which is not perfect but shows a definite relationship. The correlation broke last March when gold outperformed TIPS – as it should have – but the correlation has yet to return to its prior levels. Gold is simply not correlating well to inflationary expectations right now. 

Thinking back to the purchasing power discussion a couple of paragraphs earlier, we need to consider how gold is priced. Gold is typically priced in US dollars, meaning that a buyer exchanges a given amount of US dollars for an ounce of gold. In this case, it is best to think of gold as one other exchange rate. Exchange rates change when the purchase of a given amount of foreign currency requires a different amount of US dollars. I find it useful to use the US Dollar Index (DXY) as a proxy for the relative strength of the US dollar against a range of foreign currencies. In the chart below, we compare GLD to DXY over the same time period as in the prior graph:

Two Year Chart of GLD (white) vs. TIP (orange) with 100 Day Percentage Correlation

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Disclosure: FOREX

There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. ...

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