Gold Melt-Up Coming?
With one extreme tends to come the other. Gold fits the bill.
-- Paulo Coelho
In the fixed income space, the most hated area of the bond market has been long-duration Treasuries (NYSEARCA:TLT). In the equities space, the most hated area of the stock market has been emerging markets (NYSEARCA:GMM). In the commodities space? It's been gold (NYSEARCA:IAU). Historically, gold tends to do well in negative real rate environments. The collapse in bond prices, concerns over European gold selling to raise cash by government institutions, and fears over India's demand for the precious metal has caused many to aggressively sell.
But melt-ups happen when you least expect it. Much like how sentiment on emerging markets (which I call the “fat pitch”) is extreme, so too is the sentiment on gold. Meanwhile, there is some better relative price movement underway right here, right now. Take a look below at the price ratio of the SPDR Gold Trust ETF (NYSEARCA:GLD) relative to the SPDR S&P 500 ETF Trust (NYSEARCA:SPY). As a reminder, a rising price ratio means the numerator/GLD is outperforming (up more/down less) the denominator/SPY.
Gold relative to the S&P 500 (INDEXSP:.INX) peaked at the height of the summer crash of 2011, and it has been in an absolutely brutal period of underperformance since then. I suspect much of this has been a repricing of the inflation story, which was so hyped over the past decade, with the metal serving as a “hedge” against inflationary concerns that never materialized. However, with one extreme tends to come the other. The ratio against equities seems to be turning up, in sympathy with the fat pitch and long duration bonds as investors try to play massively oversold trades.
Could a melt-up soon come? If not now, when?
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