Fear is Here! Gold Soars as Stocks Plunge
An important and reliable correlation has broken down on Friday after a dismal jobs report sent the stock market cratering. The sharp de-coupling between the S&P 500 and the gold market on the day may be indicating that fear is really back on Wall Street and investors are starting to get worried. If you overlay a 1 year chart of the SPDR S&P 500 ETF (NYSE: SPY) with the chart of the SPDR Gold Trust ETF (NYSE: GLD) you will notice a fairly strong positive correlation between the two in 2012.
Essentially, gold has been rising and falling along with sentiment about the global economy. When the S&P rose on a bullish outlook at the beginning of the year, so too did the gold market. Conversely, when pessimism arrived in May, gold fell along with the S&P. Among the reasons for the correlation is the tendency for the U.S. Dollar to rise along with risk aversion. In turn, the rising U.S. Dollar puts pressure on risk assets such as the S&P and gold.
What you will notice, however, is that this correlation between the S&P and gold completely broke down last July and August when fear levels exploded. In this environment, the price of gold skyrocketed while the S&P plunged. An argument could be made that investor concern can be assessed by tracking the spread between SPY and GLD. When the two are trading in a highly correlated manner, it suggests that real fear is not in the market.
Alternatively, when the spread between the two diverges sharply it may be an indication that gold is again being perceived as a safe-haven asset against a very ominous backdrop. The moves in the S&P and gold on Friday may be foreshadowing more risk aversion ahead and a fundamental shift in market fear levels.
During the last trading session of the week, gold has soared while the S&P is getting flattened. In late afternoon trade, gold futures had skyrocketed over 4% to $1,627.00. At the same time, the S&P 500 has lost more than 2% to 1,282. The move in gold is coinciding with a very convincing break of the 1,300 level in the S&P along with significant moves in other fear barometers such as the VIX and the yield on the 10-Year Note.
At last check, the VIX was up around 10% to 26.40 while the yield on the 10-Year had plunged another 9 basis points to an almost unreal 1.46%. The amount of buying that is taking place in U.S. Treasuries suggests that investors are bracing for major volatility in financial markets and do not want to take on any risk whatsoever.
Furthermore, the activity in the EUR/USD may be suggesting a worsening of market conditions whereby investors are waking up to the realization that not only is Europe in trouble, but that the problems may be spreading to the U.S. economy. The EUR/USD is trading up around 0.42% to $1.2420 on the day. Normally, this would be a surefire catalyst for a rally in the stock market, but in light of the terrible U.S. jobs report, this has not happened. What all of these indicators may be suggesting is that the market is beginning to acknowledge that not only is Europe a major risk factor, but the domestic economy may be heading off a cliff as well.
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