A bloodbath for gold this week but especially today, when it was off more than $100 at its lowest point before rallying a bit:



Reuters analyst John kemp pointed out earlier in the day that this is more than a four-standard deviation move:

What happened? This correspondent lacks conviction is loathe to attribute short-term market swings to any single cause, so we’ll save you the suspense and say up front that we have no idea.

But here’s something we noticed last week but haven’t really explored.

Back when we were telling you to fire your adviser because of the heightened correlations among nearly all assets, we excerpted this line from a note by Convergex (emphasis ours):

Gold and silver traders have gotten too used to the negative correlation trade with stocks. This is, in fact, an unusual relationship for precious metals to stocks. The correlation should actually be zero. You can begin to hear the frustration in traders’ voices on days like Monday, when gold doesn’t rally on a drop in the market. Here’s a news flash: it is not supposed to move opposite to stocks. It is only supposed to move independently of them.

And through last week, you could see this clearly in a chart sent to us by Factor Advisors:

Is there such a thing as a reversion to a mean correlation? Maybe not, but we don’t have a better way of describing what’s happened to gold this week, when it finally stopped safe-havening. Whatever the cause, it seems there’s been a partial reversal of this relationship.

We asked the FT’s US markets editor, Mike Mackenzie, for his thoughts. He thinks this is part of a big unwind of the original QE2 trade. That the Fed’s embrace of Twist and lack of any signal that it would be open to further large scale asset purchases marked the end of its dollar-weakening policy. That by focusing so much on the long-end of the curve and, presumably, on reinvigorating mortgage refi, the Fed has effectively given up its previous strategy trying to raise inflation expectations (which certainly have obliged).

All sounds plausible, and we look forward to reading Mike’s longer explication of his ideas in his column next week. But so many other things have happened that we’re having trouble untangling one thing from another, as usual.

Maybe the flight to cash has as much to do with what’s happened in Europe as it does with Twist.  Maybe it’s just part of the broader selloff in commodities.  Maybe it’s just a wider case of traders caught unawares and forced to sell gold to meet margin calls. Maybe Hugo Chavez stole your country while you were reading this post.

We don’t know (as promised). But in addition to firing your adviser, right now you can probably also throw out your usual playbook for gold too.

Dude, mixed metaphors. — Ed. Bugger off, it’s Friday afternoon.

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