If gold is such a good hedge against geopolitical uncertainty, why has it been such a mediocre performer in the wake of Russia’s invasion of Ukraine?
Contrarian analysis solves what is otherwise emerging as one of the biggest investment mysteries of 2022:
Why, if gold is such a good hedge against geopolitical uncertainty, has it been such a mediocre performer in the wake of Russia’s invasion of Ukraine? Since Feb. 24, the day of the invasion, gold bullion has risen just 1%. That’s despite the very real threat of World War III, including the possible use of weapons of mass destruction, including nuclear, chemical and biological.
Contrarians are not surprised that these monumental risks haven’t resulted in skyrocketing gold prices. On the day the invasion began, gold traders were so bullish that the veritable Wall of Worry that markets like to climb was nowhere in sight.
Consider the average recommended gold market exposure level among a subset of several dozen short-term gold market timers my firm monitors on a daily basis. (This average is what’s represented by the Hulbert Gold Newsletter Sentiment Index, or HGNSI.) On Feb. 24, the HGNSI was higher than 94% of comparable daily readings back to 2000, which is well into what I consider the zone of “excessive bullishness.” I define that zone to encompass the 10% of historical HGNSI readings that are the highest.
This zone is shaded in the accompanying chart. As you can see, the HGNSI rose into this zone twice over the last six months—once in November and again in late February/early March. There has been no intervening period in which the gold timers dropped into the “excessive bearishness” zone (the bottom 10% of the historical distribution). This means that the gold market has yet to completely overcome the last six months’ excessive bullishness.
TheStreet
To give you an idea of the strong sentiment headwinds the gold market faced when Russia’s invasion began, consider the past performance of gold mining company stocks in the wake of excessive bullishness and excessive bearishness.
The differences in returns between the two rows of this table are statistically significant.
To be sure, the HGNSI is not currently in the “excessive bullishness” zone, having retreated somewhat in recent sessions as gold bullion over the last month has fallen by more than $100 an ounce. But it still remains significantly higher than average—at the 69th percentile of the historical distribution, in fact. Based on my analysis of the HGNSI data since 2000, a more sustainable buying opportunity won’t come until it falls to the 10th percentile or less.
Bitcoin
Interestingly, this downbeat conclusion does not necessarily apply to bitcoin or other cryptocurrencies. That’s because they are not well correlated with gold; they instead tend to march to the beat of their own drummers.
To show this, I calculated a statistic known as the correlation coefficient for weekly changes in gold and bitcoin over the past five years. This coefficient ranges from a theoretical maximum of 1.0 (in the event both gold and bitcoin were to move up and down in lockstep with each other) to a minimum of minus 1.0 (in the event gyrations of the two were mirror images of each other, with one zigging when the other was zagging, and vice-versa). A coefficient of 0 would mean there is no detectable relationship between the two.
Over the past five years, the correlation coefficient for weekly changes in gold and bitcoin was just 0.06. That’s sufficiently close to zero as to indicate no significant correlation. We’ve seen evidence of this lack of correlation in recent weeks, with bitcoin gaining 19% since Russia invaded Ukraine—versus just 1.0% for gold bullion.
Note carefully that this lack of correlation doesn’t mean bitcoin will do well in coming weeks. It may very well do so, of course. But the absence of a correlation means we can’t draw any inferences about bitcoin one way or the other from what contrarian analysis suggests is gold’s path of least resistance.
