By Brad Zigler | March 30, 2010 | 2:11 PM | 0 Comments
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Stocks mentioned in this piece: (NYSE: GDX)
Gold prices turned up Monday on short covering following Friday's aggressive buying. COMEX front-month metal gained more than six bucks in the day session on volume even heavier than Friday's. Still, spot gold needs a close above $1,115 to indicate last week's dip to the $1,067 level was a near-term bottom.
The trading range that presently binds gold hasn't been very satisfying to many traders and investors-bull and bear alike. Traders have had to content themselves with scalping small-scale moves while they await a real cyclical breakout.
Portfolio managers and financial advisers, however, are pretty happy with gold right now. Not because of its price per se but because of its correlation to stocks. More accurately, its falling correlation.
Gold and blue chip stocks, represented by the S&P 500 Composite, were marching fairly well in lock step in February. The correlation coefficient between COMEX spot and the SPX, in fact, reached a weeklong plateau of 80 percent before metals prices broke to the downside late last month.
CMX Gold/SPX Correlation
Yesterday, the correlation fell to 29 percent; not quite to the two-year mean of 15 percent, but a heckuva lot closer than before.
So why would this make portfolio managers and advisers happy? Because a low correlation bespeaks gold's value as a risk diversifier-the "zig" an account needs when all else "zags."
Remember, it was the confluence of risk that presaged the big break of 2008, as Ivy League endowment managers now know. With gold zigging and stocks zagging, portfolio risks now can be spread out better.
Keep in mind, though, that we're talking about gold here. Not gold mining shares. The correlation between SPX and the index tracked by the Market Vectors Gold Miners ETF (NYSE Arca: GDX), at 54 percent, is still fairly close to last month's levels.
GDX/SPX Correlation
No doubt, this development will encourage some quant-minded investors-retail and institutional-to look more favorably upon a gold purchase. How this buoys the metal's price remains to be seen, but at least gold is resuming its role as a proper risk diversifier for equity-based portfolios. That is, as long as that pesky coefficient stays low.
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