Gold and the Black Swan

Gold and the Black Swan

Gold just hit our target, but now we want it to pull back because a continued rather could be a very bad sign

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On December 14th we wrote a post titled “Gold May Be Potentially a Low-Risk Buy” which can be found here. At the time of the post, gold was trading at approximately 1234.10 as you can see in the chart image in the associated post. This morning, Gold made a new 6-month high at 1284.70 and is almost 1% above its 200-day moving average. While we were right in our trade call and timing, Gold has gone further than the $1275-$1280 target we anticipated, so it is reasonable to think about what gold may be telling us as it extends the current rally. In that same post, we wrote: Gold in the short-term is a “flight to safety” trade.  People often confuse “flight to quality” and “flight to safety”, but they are two different things despite appearing together quite a bit. The former is about finding an investment with a guaranteed return of capital, rather than a measurable return on capital. Flying into a quality investment. The latter is about fear, usually in the geopolitical realm.

Some Birds are Unwelcome

If gold continues to track higher in 2019, it could be an ominous sign. Gold commonly trades inversely to the U.S. dollar and the U.S. stock market. The fall in equities certainly put a tailwind behind gold, but the dollar has held in fairly well, the yen has been strong and the Swiss franc has also begun to move to the upside. The thing these three currencies have in common is they are often associated with a flight to quality. As mentioned above, gold is as well but gold is also a flight to safety. The take away is this; gold rallying along with the fight to safety currencies may indicate economic stress and a possible recession, but gold taking off on its own, could mean a black swan event, not just a recession. That is not what we were looking for in our December 14th post. It is now. 

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