The decoupling of gold and equities

Within the model portfolio at Iacono Research a similar decoupling has been seen in recent weeks, but David Gaffen at the WSJ MarketBeat blog made it official the other day calling the parting of ways for gold and stocks "Splitzville".

Volatile couples are fascinating to watch, even in the knowledge that their torrid fling won’t last — like Liza Minnelli and David Gest, Vince Vaughn and Jennifer Aniston, or Jennifer Lopez and any of her husbands. So it was with gold and equities, which, for a time, mirrored each other’s movements.

But these former lovebirds are splitsville — as gold has left behind the glitz and glamour so familiar to equities to return to its old style, that of a safe haven for preserving capital.
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Gold so resembled its riskier stock-market counterpart that even when stocks took a tumble in mid-August, gold went with them, a by-product of the unwinding in yen-carry trades. Speculative investors, through the end of August, sold gold and other assets as they unwound those trades.
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It was about a week ago that things changed. Since the beginning of September, gold is up about 4.5%, while the S&P 500 is down 2%, suggesting the two have finally decoupled. It suggests investors are once again seeing gold as a hedge against other troubles.

The creepy David Gest/Liza Minelli analogy aside, there are some very important points here, namely, that everything's not going up anymore and what is still going up is not likely to sit well with the boys at the Federal Reserve who will find it increasingly difficult to talk tough on inflation while cutting interest rates.

The boys at OPEC aren't making the job of Fed any easier by refusing to boost output as crude oil marches toward $80.

At it's current pace, the gold holdings of the streetTRACKS gold shares is likely to surpass that of China within a few weeks, that is, unless China adds to their 600 tonnes of reserves, something they would be well advised to do at current prices.

More important than the gold-equities relationship will be the movement of gold equities versus broader equity market. This duo is now somewhere in limbo between the 2003-2006 relationship where they largely moved together and the 2001-2002 relationship where gold stocks rose along with the price of gold while broad equity markets tumbled.

It should be an exciting few months ahead.