Global equity markets have lost over $6 trillion in market capitalization the past three weeks during the correction in stocks driven by economic and debt fears.
Earlier this summer, I noticed there were a number of very real warning signs that suggested a significant market event was likely to occur, and that a deflation pulse would return. [Leadership Shift in Sector ETFs]
Every now and then I like to run screens on my list of nearly 1,000 exchange traded funds and notes I track to see if there are underlying messages in terms of what’s working, and what’s not in ever-changing market environments. For this particular screen below shown in the table below, I wanted to find those ETFs/ETNs which were furthest above their respective 20 day (1 trading month) moving averages.
The message is clear. Precious metals (IAU, DGL, GLD, DBP, DBS, and SLV) have been star performers in what appears to be a massive risk-off trade into non-fiat investments. [Gold Nears $1,900]
However, bonds, and in particular Treasuries (TLT, VGLT, TLO, GLJ), have also done extremely well, particularly on the long end of the yield curve. Furthermore, the move in absolute terms and relative to respective moving averages is almost identical, suggesting that precious metals are actually behaving very similarly to Treasuries in this decline.
This has not always been the case. In 2008, gold declined while longer-duration Treasuries underwent a massive spike up after the failure of Lehman triggered the financial meltdown.
It appears a shift has begun in how precious metals and related ETFs behave. Gold in particular is now acting like a “risk-off” investment that actually would do well in a deflationary environment. [ETF Correlations Rise]
I say deflationary because the long end of the Treasury curve rallying as much as it has is indicative of continued deflationary pressures over a long period of time.
For gold to behave as correlated to Treasuries as it has may be indicative of a change in the way certain investors view “safe-haven” investments. After all, S&P can’t downgrade a metal like it did the U.S. government.
The author, Pension Partners, LLC, and/or its clients may hold positions in securities mentioned in this article at time of writing. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.