Investors in gold and the SPDR Gold Trust (NYSEARCA:GLD) might have questioned why the commodity and tracking ETF security fell toward the close Friday along with other thought to be safe haven precious metals securities. Very few market voices understand all the dynamic factors that affect securities trading, but I see why gold and the SPDR Gold Trust fell while the situation in the Ukraine was escalating. It was counterintuitive, but also explainable. More importantly, I believe further counterintuitive selling could occur in the week ahead, which I believe would only avail an opportunity to buy the flight to safety destination and its peers.
The GLD started the day lower for the same reason the SPDR S&P 500 (NYSEARCA:SPY) moved higher. U.S. economic data published in the morning Friday, supported by the testimony of Fed Chair Yellen on Thursday, was the catalyst. The economic data flow was mostly positive, and when it was less than celebratory, it remained at least as or better than expected by economists. Consumer Sentiment, Pending Home Sales and Chicago PMI data points all exceeded expectations and posted improvement, while the Q4 GDP revision was about in line, though lower than the initial report. When matched against recently poor labor and housing data, as well as consumer relative data, the news was relatively good enough to lift stocks Friday. Concerns about the state of the retail sector were quelled as well last week by better than expected corporate earnings reports, including from Target (NYSE:TGT) and Sears (NASDAQ:SHLD). The news flow through the week was enough to lift the S&P 500 into the green for the year and kept the SPY in the green through Friday's escalating situation in the Ukraine.
Into the close of the day, though, the SPDR Gold Trust security declined. It matched against what looks like some quick trigger bargain hunting for stocks that sent the SPY upward in the final minutes into the close. Panic had not yet set in with regard to the geopolitical risk that is escalating in the Ukraine. When it does though, gold and the GLD may fall in concert with stocks and the SPY. Why is that?
At times of macro driven sudden decline (read crash) or incline, beta correlation across securities move to 1.0. In other words, everything moves together; we saw it display at the height of panic in the financial crisis. The reason for this is because, in the case of a selloff, broad selling by institutions is spread among holdings across security sectors as capital goes to cash or treasuries. However, such blind selling would be followed by discretionary action that would surely look to add gold holdings in most portfolios during a quickly developing geopolitical crisis.
Last 12 Mos.
SPDR Gold Shares
iShares Silver Trust (NYSEARCA:SLV)
Market Vectors Gold Miners (NYSEARCA:GDX)
Direxion Gold Miners Bull (NYSEARCA:NUGT)
Friday's decline in the precious metals securities listed here was surely partly driven by capital flow into stocks to start the day Friday. However, any future shock could cause these securities to drop unexpectedly on the blind selling described above. Because of the weekend, in this case, we may not see that as portfolio managers have time to prepare a plan of action. Whether they do or not, the escalating geopolitical crisis in the Crimean Peninsula calls for capital distribution to precious metals in my view.
There are still doubters, or people who tend to see the world with rose colored glasses, sometimes tinted by the green of greed. However, as I author this article on Saturday evening, the situation has only escalated. Last evening, President Obama issued a clear warning to Russia, stating that any breach of Ukrainian sovereign territory would bear costs. Russia responded today by calling for the recall of its Ambassador to the United States and approving Russian President Putin's request to allow for troop deployment into the Ukraine. This evening, the United Nations Security Council met, with the Ukraine and Russia depicting the situation in perfect contrast. Each nation is saber rattling, and the situation is on a hair trigger that could easily fall into the chaos of war. Presidents Obama and Putin reportedly spoke over the phone for 90 minutes, but the discussion and any results of it are yet unknown.
Considering the position of Ukraine, both geopolitically and geographically, any deterioration of the situation would surely impact global securities markets. Instability in Europe between global powers should disrupt fiat currencies as well as stocks, and provide more capital fuel for gold and the GLD to run. So, barring a sudden peaceful resolution to the issue, if gold and its relative securities including the GLD sell off on either the rose colored perspective or in a blind selloff of securities, I suggest investors add the GLD security this week, and consider some of its precious metals relatives listed herein as well.