Gold Has Lost its Catastrophe Premium

Gold Has Lost its Catastrophe Premium

Investor’s have normally bought gold for one or more of three reasons; a weakening dollar, a hedge against inflation (which some would say is interchangeable with a weaker dollar) or some inevitable catastrophe in which gold would again become the currency of choice. Do any of these three apply to right now? Well, the answer is two of them do…sort of.


Gold’s relationship to the US dollar has taking over again as it should, but the dollar is hardly weak. Since May of 2016 the US Dollar Index is up over 11% and over 29% since May of 2014. The historically strong inverse correlation between the dollar and gold is definitely in control, pressuring gold lower.

Gold’s reputation as a hedge against inflation isn’t really effective in the long-term, when you consider that investors would only want to hedge against long-term inflation, not short-term blips in data. In nominal terms, gold jumped above $650 an ounce in 1980 and then reached an all-time high of $1,921.17 in 2011, almost tripling in value. That performance however, is misleading once adjusted for inflation. In those terms, investors buying gold in 1980 for $650 would never have gotten their initial investment back (even at gold’s peak in 2011) once adjusted for inflation.

The third reason, catastrophe, has just about been priced out of the precious metal. Since the high in 2011, gold has lost almost 40% of it’s nominal value and an even bigger indictment is the fall in gold volatility (vol). Gold vol has also been steadily declining since 2011. In the last 2 1/2 years, gold vol has mostly ranged between 15-24 save for a spike above 30 on Feb. 11th 2016, when the Hang Seng  fell 3.8% and the Stoxx 600 fell 3.4% in a single day. This compares to a range of 43.51 all the way down to 8.43 from 2011-12 an a high of 71.96 in 2008. The market simply does not believe there is an event currently underway or coming in the future that could threaten the global economy. That kind of sentiment often does not play out the way the market anticipates.

While gold may be out of favor with long only investors, traders need to be aware that lack investor interest doesn’t mean lack of opportunity. On Nadex there are plenty of strike choices and expirations in the precious metal where the trade opportunities are clearly defined as to the maximum risk & profit potential. So gold bugs may be squashed for now but for traders on Nadex, the gold may still be shiny.

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