Thursday, July 29, 2010

Gauge Of Inflation / Safe Haven Components For Gold

Gold sometimes rises becasue of inflation fears, and sometimes out of fears for the financial system. Steve Place concludes that gold was not pushed up by inflation demand after checking the correlation between GLD and a multi-commodity ETF (DBC). While gold was going up late last spring, the correlation between the two dropped to only slightly positive - or near-zero.
This is a correlation between two etfs: GLD and DBC.... DBC is a commodity etf that has exposure in heating oil, crude, gold, natty, zinc, and others. Basically, when GLD and DBC are highly correlated, that means there is more risk of inflation, and when the correlation breaks down, it means we are in a “risk aversion” mode.

This can actually make for a nice long term timing of the market, and we’re coming down to levels in which I feel the risk for reflation could be coming back into play (maybe). A confirmation would be a drop in demand for treasuries.

It's an interesting tool, as it's sometimes hard to see whether financial-crisis demand is tied to expectations of future inflation or not.

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