Commodities

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Gold's reputation as a refuge in times of trouble is one of those things that seems so intuitively obvious that it's more or less immune to fact.

Take the period from July 1997 to September 1998, when the Asian financial crisis brought devaluations to half a dozen countries, the Russian ruble collapsed, and hedge fund Long-Term Capital Management was bailed out. Far from gaining from safe-haven flows, the yellow metal fell 13 percent.

Or consider the past 12 months or so. Since the U.K.'s surprise Brexit vote in June last year, investors have seen the impeachment of one South Korean president and, potentially, two Brazilian ones; a coup and brutal government backlash in Turkey; suspected Russian interference in a U.S. presidential election; Britain's first minority government since the 1970s; and the rising risk of a U.S.-China trade war. Spot gold is up a mere 1.5 percent over that period, from $1,257 an ounce on the eve of the U.K. referendum to about $1,276 an ounce at present.

Home on the Range
Spot gold has only rarely broken out of a $1,100 to $1,300 range it's held since 2013
Source: Bloomberg

Indeed, in the six weeks after the U.S. voted into office a man who had said that NATO is obsolete and bragged on tape about routine sexual assaults, gold actually fell by almost 11 percent. Over the past week alone, there's been a nuclear-armed war of words between the U.S. and North Korea; reports of an FBI search at the home of President Donald Trump's former campaign manager; and the president himself struggling to find words to condemn deadly violence by white supremacists. Gold's reaction? Up an unspectacular 1.2 percent.

One of the reasons for this non-pattern is that no other commodity behaves quite the way that gold does. Most are leveraged in a fairly straightforward way to economic growth, with details of industries' relative demand for materials and fundamental supply factors accounting for most additional variation.

Gold isn't like that. On one hand, the behavior of largely Chinese and Indian jewelry buyers does correlate quite closely with GDP and consumer sentiment. On the other, there are coin, bullion and ETF investors in the U.S. and Europe who believe the safe-haven myth, or the separate stories about gold's ability to protect against either inflation or deflation, or all three.

They're looking at the world economy too, but from a different perspective, so don't quite cancel out the jewelry buyers. Further complicating the picture, there are central banks and more sophisticated investors who are simply trying to diversify their portfolios with something that doesn't correlate well with debt, equities and other commodities, plus those who momentum-trade the behavior of all the other groups.

The result over the past few years has been stalemate. Since 2013, the metal has rarely broken out of a $1,100 to $1,300 trading range. So far this year, the lower limit has been more or less limited to $1,200. Volatility, as measured by the CBOE Gold ETF VIX Index, which tracks options on the biggest physical gold ETF in a similar manner to the better-known VIX equity volatility index, touched a record low in June.

Golden Is Silence
Options volatility on the SPDR Gold Shares ETF hit a record low in June
Source: Bloomberg

There's one glimmer of hope for the safe-haven fans.

One problem with the argument in recent years has been that gold and the VIX itself -- the market's traditional fear gauge -- don't fly much in tandem. The correlation between spot gold and the volatility gauge has been very slightly negative since the index started in 1990, but it went seriously out of whack over the past decade. Since Lehman Brothers filed for bankruptcy in September 2008, the correlation has been a negative 0.38, suggesting that when the VIX rises, gold has been more likely to fall, rather than vice versa.

Low Volatility
$100 invested in the Vix and spot gold would have taken you in very different directions since Lehman's bankruptcy
Source: Bloomberg

One thing has changed of late. From Barack Obama's first inauguration to his departure from the White House, the correlation was a negative 0.19. But since President Trump took his oath of office, it's swung back bigly, to a positive 0.23.

Stop, Correlate and Listen
The long-running negative correlation between gold and the Vix index seems to have reversed
Source: Bloomberg, Gadfly calculations
Note: Correlations of +/- 0.1 to +/- 0.3 are normally considered weak; from 0.3 to 0.5, moderate; and from 0.5 to 1, strong. A positive correlation means the numbers move in the same direction, negative means they move in opposite directions.

Gold's safe-haven demand may be based on unsound foundations -- but like Tinkerbell, it exists if enough people believe in it.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net