In February, analysts reacted exaggeratedly on gold as it falls along with the stock indices and grows on the upward trend recovery in the S & P500. In an attempt to explain the irregular dynamics of safe-haven assets, Bloomberg experts start to look ridiculous. The assumed maximum highs of XAU / USD in response to the correction of the US market suggests that the rollback will be flat. However, what does the price increase for precious metals indicates against the backdrop of the stock index rebound? Does it show indications that the renewal of record highs will not happen as expected?
No more questions emerged regarding the weekly outflow of funds from gold ETFs with an amount equivalent to 21 tons. As a result, net flows since the beginning of the year have returned to zero. If we are talking about the asset-refuge, then why throw it away from the portfolio against the background of fears for the fate of the world economy? Or precious metal has become a risky asset. Why did it happen?
Based on opinions, the reasons for what is happening should be referred to volatility, due to the prevailing growth risks of this indicator in the market. According to Goldman Sachs, neither stocks, bonds, nor currencies are able to compete with the VIX fear index.
Dynamics of fluctuations risks in assets
Source: Zero Hedge.
In order to ease the effects of the global economic crisis, central banks switched to the cheap money policy and flooded the markets with unprecedented liquidity, which ultimately resulted in a drop of volatility to multi-year lows. The acceleration of the process was due to active hedging of risks of correction for the S & P500. The higher increase of stock index, the more money poured into derivatives, allowing to ensure the risks of its decline. As soon as the technical correction in the US stock market progress, it immediately resulted in winding up the record long for VIX.
Investors understand that the return of the period of low volatility is no longer visible. It goes along with the normalization of monetary policy by the leading central banks of the world. And in such conditions, it is unlikely that the upward trend in the S & P500 with the previous inclination angle is expected to continue. At the same time, fears of overclocking inflation and related aggressive actions of the Fed led to an increase in the treasury bond yields. For 10-year securities, the rates float near the 4-year high, coupled with rising volatility that cause carry traders to return to funding currencies. Hence, the Japanese yen reached its 15-month highs against the backdrop of the recovery of the global risk appetite.
Last year, gold moved quite synchronously with the USD / JPY currency pair. Therefore, it is not surprising to see its success in dealing against the rising stock prices of American issuers. Furthermore, there is only one thing that seems obvious, that is the potential reduction of XAU / USD is limited. If the markets do not return to the previous levels of volatility, then there is no reason to expect a decline in precious metal below $ 1.290-1.300 per ounce
Technically, there is a depletion of the corrective movement within the framework of the "Shark" transformation pattern at 5-0. A confident resistance test at $ 1.350-1.355 will open the road to the north.
Gold daily chart
* The presented market analysis is informative and does not constitute a guide to the transaction.
