By Michael A. Gayed
“Never be afraid to sit a while and think.” – Lorraine Hansberry
Gold is sometimes a tricky asset to figure out. Traditionally, the yellow metal trends nicely in negative real-rate environments, whereby inflation is higher than nominal interest rates. The argument goes that negative real-rate environments result in money positioning into the metal as an inflation hedge given its historical behavior as a way of preserving wealth in the pre-fiat economic system.
Sometimes gold acts like a “risk on” asset which rallies with equities like the S&P 500 SPDR ETF SPY +0.37% . Sometimes, it rallies with Treasurys in a “risk off” period where behaviorally deflationary trades tend to do better. This makes the absolute price movement of gold — repped here by the SPDR Gold Trust ETF GLD +0.17% — somewhat difficult to predict because its behavior changes in different market regimes. This holds true independent of whether you view gold as an investment, trade or hedge. Contrast this changing behavior to that of more traditional sectors of the stock market like utilities, consumer staples and health care, which our equity-sector ATAC Beta Rotation Fund BROTX -0.35% can position fully into during periods of heightened volatility.
Where gold is perhaps most interesting, in my opinion, is in its relationship to black gold, oil. During volatile periods for equities, gold tends to do fairly well relative to oil. Interestingly, this behavior somewhat tracks the VIX index, which itself rises during heightened fear periods for the stock market.
Take a look below at the price ratio of gold ($GOLD) relative to light crude oil ($WTIC) in the reddish line, and the spot VIX index in black behind it. As a reminder, a rising price ratio means the numerator/gold is outperforming the denominator/oil. A falling ratio means underperformance.