When Risk does Well, Gold does Not
Gold is a safe haven where investors go to reduce risk and keep their wealth. It is not primarily a hedge against inflation, contrary to popular opinion. It's a hedge against financial risks of all kinds which can include inflation (however you define that), default, currency instability, political uncertainty, bank insolvency, confiscatory taxation etc. When western investors want to take on more risk, they generally sell gold, and when they want less risk, they buy it.
When Risk does Well, Gold does Not
Gold is a safe haven where investors go to reduce risk and keep their wealth. It is not primarily a hedge against inflation, contrary to popular opinion. It's a hedge against financial risks of all kinds which can include inflation (however you define that), default, currency instability, political uncertainty, bank insolvency, confiscatory taxation etc. When western investors want to take on more risk, they generally sell gold, and when they want less risk, they buy it.
So, how do you measure a creeping aversion to risk (which is a leading indicator for higher gold prices)? Look at credit spreads. We like any sign of a growing divergence between high yield or junk debt on the one hand and high quality corporate debt on the other. For higher risk debt we use HYG or JNK, two large ETFs. And for the better quality stuff, we use LQD, another ETF. Here is the ratio, which shows an increased perception of credit risk and a growing unwillingness to pay for it, since July of last year.
