Commodity Trading Trends: Gold Stuck In A Correlation Rut

Gold is one of the most popular speculative instruments available in today’s markets. Many view gold as a safe haven from equities and a good place to be when volatility is hitting home. But over the past weeks, this notion has been anything but true, as gold has gotten itself stuck in a correlated trend with major equities. This can cause major damage to a portfolio, as most investors plan for gold to exhibit inverse movements to markets, providing a good hedge against unseen volatility or market dips. As recent trading days have been plagued with bad news, gold has seen its price falter right along with equities, frustrating investors who have long relied on the metal to shine on weak days [see also 25 Ways To Invest In Silver].

Gold is currently sitting around $1,715/oz. and has been no stranger to big moves over the past few months. The metal broke through the $1,900 barrier in late August prompting many analysts to call for $2,000 gold in just a matter of days. But the following weeks saw gold plummet and fall into a correlated trend with the S&P 500. Starting at the end of September, the SPDR Gold Trust (GLD) has featured an approximate 0.77 correlation to the S&P 500 ETF (SPY). Looking back into gold’s history, however, the metal has featured strong correlations over the past few years, surprising a number of investors who have long believed the metal to do just the opposite. With gold stuck in a correlated rut and its price sitting relatively low, the metal presents itself as an enticing commodity trade in today’s environment [see more at Gold And Silver In A Correlation Bubble?].

Ways To Play

For investors who have a strong opinion on where gold is headed, or for traders looking to make a quick return, there are a wealth of options available. Perhaps the most direct method comes from the February GC Gold futures contract offered on the COMEX. The February contract is currently the most heavily-traded future and will offer the best liquidity. But not everyone is savvy to futures markets as they can be quite complex and difficult to understand. GLD, another option, is an ETF that measures physical bullion that has become wildly popular among the investing world. For those who like the ETF structure, the iShares Gold Trust (IAU) also offers physical gold exposure at 15 basis points less than GLD. Finally, an indirect play can be made with a number of equity-based gold mining firms like Barrick Gold (ABX) or Kinross Gold (KGC) [see also Three Reasons Why Gold Is Overvalued].

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Disclosure: No positions at time of writing.

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