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On The Recent Drop In Gold

|Includes: SPDR Gold Trust ETF (GLD)

Gold is the one commodity most-asked about by friends and family. I definitely do not trade gold futures and seldom do I trade the gold ETF's (e.g. GLD). Yet, it seems the "gold bug" will live on to eternity.

What I have maintained for months, is that the issue with Gold stems from the breakage of traditional correlations that old timers like myself were brought up believing in.

In particular, Gold has always served as the Safe Haven in case of turmoil or inflation. Yet, in recent years, and especially since the Financial Crisis, a new perspective on Gold has arisen. In this case, people faced with near-zero interest rates, and a choice between treasuries on one side and gold on the other, had no preference of one over the other, save that the unusual level of central bank spending and intervention meant that the currency exchange market was too risky, and hence keeping bonds, in any currency, was riskier than usual.

Take the scenario that started playing out a few months ago (check the chart), and that is: the expectation of inflationary pressures, and the subsequent rise in treasury yields. Faced with this, it seems many investors who were quite happy with zero-yielding gold are now faced with 2+% yielding treasuries, with similar safe-haven quality, a stabilizing financial outlook, and lower expectations of turmoil. Why would they keep their money in gold?

If you check the equivalent GLD chart, then the answer becomes obvious, and even more pronounced in the 3-year weekly chart!

In essence, inflation, which is traditionally the "gold-trade maker" has become the "gold-trade breaker." What I told friends months ago, is that if interest rates start climbing, and as long as they stay within realistic "historic" ranges (no hyperinflation), then gold will become out of favor. I believe, this is what we are seeing coming in play.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.