Izabella Kaminska over at FT Alphaville posted the following chart of gold vs. the US 10-year TIPS yield:
Click to enlarge
Ms. Kaminska then goes on to attempt to explain gold’s recent underperformance relative to US Treasurys and ever plunging real yields. The Goldman Sachs’ research report which she cites basically argues that all QE isn’t created equal and that only QE which expands the monetary base is truly bullish for gold.
I believe there is a much simpler explanation for gold’s recent broad rangebound trade since the correction from the August 2011 parabolic top. In the space of less than one month during August 2011 gold rose more than $300/ounce due to widespread investor fears that the largest monetary union in the history of the world was on the verge of unraveling. Since then, the “tail risk” of a eurozone meltdown has steadily abated (at least in the eyes of the majority of investors) and as a consequence the “fear premium” that had so eagerly rushed into the gold price has steadily melted away. Even the continued global central bank monetary policy easing/monetary expansion has failed to bid gold up above significant resistance at $1800/ounce:
The chart above excellently illustrates the simultaneous spike in the VIX and gold during July/August 2011 as investors fled equities. Since the gold price peak on August 23rd, 2011 (in US dollar terms) US stocks have rallied impressively higher, US Treasury bonds have continued to baffle the bond bears, and the VIX has fallen to near record low levels.
As perceived tail risk has receded, gold has had trouble finding its footing for any extended period of time. With the new year fast approaching investors might want to ask themselves a couple of questions: Is the market’s perception of tail risk correct? And given that markets don’t seem to be all that concerned about the US Fiscal Cliff what would happen to gold if the US were to unexpectedly fall over the cliff?