As if it were a segment in “Orange is the New Black,” the price correlation between Crude Oil (aka Black Gold) and the Yellow Metal continues to swing like a chandelier in a windy mansion. Below extract courtesy of Neil Azous, from today’s a.m. edition of Rareview Macro’s Sight Beyond Sight summarizes the current correlation in a crisp way…
There are two assets being watched closely right now – Brent Crude Oil and the Euro Exchange Rate.
Firstly, Brent Crude Oil is showing the largest negative risk-adjusted return in Commodities. This morning, the “barrel” has broken through yesterday’s low and overall has now retraced over 50% of the Iraq/ISIS move higher seen in June. Below is a regression analysis between Brent Crude Oil and Gold for three time periods related to Iraq/ISIS: Before, Height, and Current.
Gold was trading at its lower point on June 2nd and the correlation (i.e. red asterisk on chart) to Brent Crude Oil was negative. On June 19th, the correlation was the most positive when Brent Crude Oil was at its highest level. Today, the correlation is on the cusp of swinging back to negative territory. We highlight this because the same pattern has been seen before, with the height on March 14th and after the Ukraine-Russia crisis. And what happened next? Gold dropped by -10% over the next 45 days.
By the way, it was reported that assets in the SPDR Gold Trust (symbol: GLD) rose +1.4% to 796.39 metric tons in the two sessions through yesterday. To put that in context, that is the largest two-day gain since November 2011 and it is just one example of the new found retail length in Gold. The other was in CFTC futures positioning which professionals use to gain exposure.
To be fair, we would concede that Gold has yet to react to this reversal in correlation. We are not sure if that results from investors anticipating further US Dollar weakness following tomorrow’s European Central Bank (ECB) meeting (i.e. EUR/USD erases June 5th easing measures and trades above 1.38) or from a long US holiday weekend that traditionally brings sensitivity around Crude Oil on account of worries about a terrorist strike on US soil. One or the other may be holding Gold up.