Why Are Gold Prices Struggling While Equities And Bond Yields Are Tumbling?

Several equity indices around the globe are officially in a bear market while the US 10-year bond yield has plunged to a record all-time low. Yet gold is struggling to make gains beyond highs set ahead of the Coronavirus escalation in late February.

Gold is Straying from Typical Correlations

Gold prices have once again veered from common correlations as the yellow metal portrays a somewhat unusual reaction to market conditions.

Prices of gold are typically seen as a safe-haven and move opposite of the equity markets. This has certainly not been the case as of late as the S&P 500 (SPY) closed near lows not seen since June on Wednesday while spot gold has pulled back about 4% from its recent high.

Further, comparing the momentum of the decline in equities with the rally in gold prices over the last few weeks, it’s quite clear that risk sentiment is not the primary driver for gold at the moment.

Another common correlation is between gold and bonds. Once again, some correlation is seen, but there is enough evidence to make a case that the urgency seen in bond price fluctuations are not seen in gold.

The 10-year yield showed a single day drop greater than 50% at one point on Monday. Gold prices do seem to be tracing out the general direction of bonds but bear in mind that the 10-year yield is about four standard deviations below its average over the last six months.

In comparison, gold prices are currently testing support from the 20-day moving average which is a far stretch from the breakout in treasury yields.

Lastly, USD/JPY fell to lows not seen since late 2016 earlier this week. The currency pair recovered the losses on Tuesday but fell under pressure once again after running into resistance at 105.50.

The turn lower from resistance has led to a decline back to negative territory while gold prices have diverged from the inverse correlation and trade a fair distance below this week’s open.

Margin-Call Related Weakness?

Several media outlets are floating a narrative that gold prices are experiencing weakness as traders are covering profitable positions in the yellow metal to meet margin calls in losing equity positions.

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Gary Anderson 1 year ago Contributor's comment

Gold seems to act as a hedge against inflation, but not against deflationary pressures.

Backyard Hiker 1 year ago Member's comment

I would think that in days of #COVID19, people would be flocking to #gold.

Gary Anderson 1 year ago Contributor's comment

Maybe they will but we could be in a deflationary period which makes the dollar soar.