Gold is supposed to go up when investors and traders are looking for safe havens and hedges against market volatility. So it makes sense the gold and gold mining stocks are gaining as coronavirus stalks through the land. Gold closed up 0.99% today to $1570.50 an ounce.
But the financial markets don’t seem to be afraid of the fallout from the coronavirus. Stocks keep hitting new record highs and the VIX “fear” index (VIX) keeps creeping lower. The VIX fell another 1.06% today to 14.98.
One of these trends would seem to be wrong–unless, of course, the rise in gold isn’t a reaction to hedging and the fall in the VIX has to do with the very short time frame that the index tracks.
First, It looks like a key driver in the rise of the price of gold is buying by global central banks in an effort not to hedge risk but to move their portfolios away from the U.S. dollar. Central banks purchased a record $15.7 billion of gold in the first six months of the year of 2019, accounting for nearly one-sixth of total global gold demand in the period. That buying continued in the second half of 2019 with central bank gold purchases climbing 17 metric tons from the 50-year record set in 2018. Some of the biggest buyers weren’t at all surprising–Riussia, Turkey and Kazakhstan. But other buyers haven’t been seen in the market for a long time. In February 2019, for example, the Reserve Bank of India increased its purchases by 40 tons–India hasn’t increased its gold buying in a decade.
So this buy began before the coronavirus and is a reflection of a projected decline in the U.S. dollar.
Second, the VIX is a measure the expected volatility of the S&P 500 Index over the next 30 days that is implied in the bid/ask quotations of SPX options. Thus the VIX Index is a measure of short-term fear–over the next month or so–and really says very little about the market’s opinion of volatility, say, six months from now. A declining VIX really only indicates that investors and traders don’t see a need to pay up for protection on the volatility of the S&P 500 over the next month of so.
So what we could be seeing, and this makes sense to me, is the rising price of gold saying central banks and other buyers are worried about volatility and particularly the volatility of the U.S. dollar in the medium to long run, and the falling VIX saying that investors and traders aren’t afraid of stock market volatility over the next month.
Might be time to think about a little more gold exposure. The most efficient way to add exposure to gold price moves is by owning shares of gold miners such as Barrick Gold (GOLD). I own shares of Barrick Gold in my Jubak Picks Portfolio (up 17.63 since June 21, 2019) and my long term 50 Stocks Portfolio (up 36.13% since May 14, 2018.) I also own the SPDR Gold Trust ETF (GLD) in my Jubak’s Picks Portfolio (up 16.80% since September 11, 2017.) I also have a 20% portfolio weighing on the SPDR Gold Trust in my Perfect 5 ETF Portfolio (up 21.99% since October 3, 2017.)