I’ve talked about gold a few times here on InvestorPlace, as this is a super interesting juncture for the precious metal. As of this writing, gold is standing out in a big way, with it being up over 3% on no obvious news. The SPDR Gold Trust ETF (NYSEARCA:GLD) has gapped up.
Why? Well first, let’s discuss what gold ultimately means in a portfolio. As I’ve argued continuously, the power of gold is in its behavior as a diversifier. It doesn’t really correlate to stocks. It doesn’t really correlate to bonds. It doesn’t really correlate to the dollar.
What it does tend to correlate to is high-volatility risk-off sequences for the stock market. Gold is a safe-haven trade, at least for a moment in time, when investors worry about risk assets falling.
Gold Is Waking Up
We are starting to see gold meaningfully wake up here entering the back half of October, which I continue to stress is a high-risk period for stocks. The movement here is telling, as it’s coinciding also with strength in utilities (a defensive sector), and yes, long-duration Treasuries as well (finally).
I noted in yesterday’s writing that credit spreads are starting to widen, and a continuation there would also likely cause a flight to safety sequence in gold alongside Treasuries.
Right now, I view the movement in gold as another signal that we are close to something major potentially happening. If big allocators are nervous about equities, they want less correlation to beta and anything that would act like stocks. That means less correlation to high-yield junk debt (again — the source of Phase 2 of the credit event), as well as anything that is a crowded trade.
This is an important point, too, when it comes to gold. The reality is not that many people have been interested in allocating or trading it because performance has been stuck in a wide range for many years.
Play It Directly
What about the miners? That’s a separate topic for another day, but I always go back to the idea that if you’re going to play gold, play it directly. Even a small allocation can have a large impact on an overall portfolio, and the timing here could be outright ideal if I’m right about imminent credit event risk.
This remains one of the more important dynamics to watch now. I often talk about gold relative to lumber as an indicator, and the surge here is sending that risk-off indicator into warning territory.
Maybe it’s noise today, but I doubt it. Watch gold in the days ahead for confirmation. It’s not just a signal, but also something that could help mitigate loss and save your portfolio.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
