Gold is sending a big warning, and the market isn’t paying attention.
Instead of questioning a sky-high rally in gold prices, investors are too busy focusing on Bitcoin (BTC-USD) and the S&P 500. Ignoring gold is a sure way to miss out on whatever is brewing in the market.
I think what we saw last Thursday was foreshadowing. If you’ll recall, stocks were strong throughout the day and Treasurys were weak, only to completely flip on rumblings of Iran potentially striking Israel. Admittedly, a deep understanding of what’s going on in the Middle East beyond the headlines is beyond my pay grade. All I know is that the movement in gold and now oil does seem to suggest that, at the margin, big money is worried about serious conflict that could throw the entire geopolitical landscape into a tailspin.
Why Gold Prices Could Be a Sign of Trouble
Again, this isn’t fear mongering. Gold is an uncorrelated asset historically, and despite what social media gurus tell you, big money doesn’t short stocks when it’s worried about an imminent correction or crash. Institutional players must be largely long-only and always invested. And the reality is that more investments are tied to beta.
In other words, most things are correlated to stocks. Gold isn’t. Historically, gold does act as a safe haven when risks rise, just like Treasurys do when credit spreads blow out.
The ramifications go beyond the Middle East. Should oil prices spike, the Bank of Japan could enter a panic. This is because Japan imports a great deal of oil, particularly relative to its weaker yen. Higher oil prices could exacerbate the potential for a reverse carry. They could be the catalyst for a global margin call. This shouldn’t be seen as controversial, but rather scenario analysis for a plausible cause-and-effect sequence.
This looks like we could be entering a more classic risk-off period here, where Treasurys, with gold, stand alone as everything else reprices risks around us.
The world is not a safe place, and neither is the uptrend on the S&P 500. Conditions exist for an accident in the near term. And while no one should want to see it, we can’t ignore it either.
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.
