Gold is the ultimate hedge, but it is far from perfect. Unlike, say, sovereign bonds there should be no expectation for a negatively correlated price. You can buy a UST or German bund even at negative yields and at least expect the price to rise when things are at their worst. Flight to safety or flight to liquidity.
You can’t with gold. One big reason is its seemingly opposing uses. I got a chance to sit down once again with Erik Townsend of MacroVoices to talk about gold, negative rates, and the lies (of omission) of Janet Yellen, but to further that discussion, particularly the gold parts of it, I’ll add more here.
While a UST will rise in value during a liquidity event partly or even mostly because of its status in repo, the opposite happens in the gold market. Though gold is a collateral of last resort, too, it isn’t as flexible and so it gets dumped whenever deployed that way. Very negative for its price.
So, it ends up in a tug-of-war between what I’ve called collateral gold (negative price) and fear gold (positive price). What ultimately might determine which one wins out is hard to predict, and it’s not a precise and straightforward mix at least inferring ahead of time.
As I wrote last December during the landmine:
Gold may be collateral of last resort but many still treat it as a hedge against everything going wrong – including central banks and their numerous big errors (forecasts). Therefore, even with renewed deflation and market liquidations tied right into collateral problems gold has been moving in that other direction – UP…
In other words, if there wasn’t this fear bid, gold would probably be down huge likely more than it was after April 18. That it’s not and is in fact at multi-month highs is a testament to the level of anxiety permeating global markets right now.
In 2008, for example, collateral gold was unleashed in the immediate aftermath of Bear Stearns – which makes sense given what Bear taught the marketplace about illiquid securities and the need for repo reserves. Gold was down sharply as collateral became very hard to source.
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