Tags: wiedemer | gold | de-couple

Gold Is Beginning to De-couple

Wednesday, 24 Aug 2011 11:36 AM

By Robert Wiedemer

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That’s right; gold is showing real signs of finally decoupling from other risky assets, most notably stocks.

"De-coupling" is the action word here, not "decoupled." Gold hasn’t de-coupled yet, but the recent financial market instabilities in the wake of the debt ceiling crisis and the S&P downgrade have shown that it is clearly de-coupling.

On many days during the crisis, gold went up, sometimes a lot, when stocks went down. And, the same was often true in reverse, gold went down when stocks went up. Gold has also often been coupled to other commodities, most notably oil. In the recent crisis oil fell to one year lows whereas gold soared more than 10 percent.
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I have always said that the key sign that gold is de-coupling is if the Dow falls 2,000 points and gold doesn’t fall with it. Well, at its lowest point during its recent collapse, the Dow fell almost 2,000 points and gold was still up — substantially.

So, why do I say gold hasn’t fully de-coupled yet? In a fully de-coupled situation, gold would be even more inversely correlated to the stock market.

When gold finally de-couples it will become inversely correlated to gold to a very high degree. Also, it has not achieved any significant safe haven status yet. That still belongs to — paradoxically — the recently downgraded US Treasury bond.

Also, the de-coupling is fairly recent. As you can see from the chart below, gold was still fairly well coupled to stocks as recently as late June. In fact, I did a presentation on gold the first week in July and after looking at the data decided not to say that gold had decoupled.

Story Continues Below Chart.

bobweidaug23cut.JPG
Click to Enlarge  (Red = SPY; Blue = GLD)

Gold has been de-coupled from stocks in a long term sense over the past decade. I always point out the performance comparison — gold is up more than 500 percent and stocks are up 0 percent.

De-coupling as I am referring to it in this article is on a short term basis, not a long term basis. Even during the last decade, when gold has risen substantially, if the stock market took a hit, gold often took a hit. Of course, it always rebounded more strongly than stocks, but it was still coupled to stocks and to commodities. When other metals fell significantly, gold would also fall. De-coupling would change all this.

Why is de-coupling so important for gold? Because it is graduation day for gold — the day it becomes viewed as an investment in its own right — an investment that goes up when the stock and bond markets go down and an investment that goes up even if other commodities go down. And it, when it is fully de-coupled it will be seen as a safe haven financial asset in turbulent financial markets and not as a commodity. As such, it will become an increasingly desirable investment.

Full de-coupling from stocks and commodities means gold’s golden years have arrived. Again, we’re not there yet, but the recent debt ceiling crisis showed we are clearly getting there.

About the Author: Robert Wiedemer
Robert Wiedemer is a managing director of Absolute Investment Management, an investment-advisory firm for individuals with more than $120 million under management. He is a regular contributor to Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here to read more of his articles. Discover more about his latest book, "Aftershock," by Clicking Here Now.

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