During the second half of the year the correlation between gold and equities has climbed. According to Scott Barber with Reuters the correlation between gold prices and the MSCI AC World Index has risen to 0.5, indicating the two instruments trade in the same direction. A negative correlation would indicate the two assets move in opposite directions.
One explanation for this change in performance may be a need for increased capital. Leveraged equity investors who were also long on gold may have had to liquidate profitable gold positions to maintain other losing stock investments when equity prices went south in mid-July.
Traders may be able to use the correlation to their advantage as gold prices would likely rise with equities in the risk on environment while falling in a risk off scenario. Given the dire situation in Europe, the latter seems more likely to prevail. Support for spot gold is found at the November low of $1,681 with resistance at the November 10th low of $1,735.
Read more forex trading news on our forex blog.
By Russell Glaser
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.