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Gold and Bitcoin Heading Lower, Correlations Diverging

Gold has been moving lower over the last few sessions, even as stocks have been moving into bear territory.  One would naturally think that the opposite would occur, as gold is often considered a hedge to a falling stock market.  However, at some point gold and other hedging currencies, start to fall as well.  Stocks are down 20% from the highs.  Margin calls are being called in and people need to raise cash.  One-way traders will begin to raise cash is to sell gold.   On today’s cash market open at 8:20 EST, gold sold off from roughly 1640 down to 1605.  It is down over 3% near 1589 as of the time of this writing. On a 240-minute chart, we can clearly see the how stocks and gold are now moving together.  The correlation coefficient is now back above +.50.   This indicates that more than half the time the 2 assets are moving together.  We can see that before March, a majority of the time the 2 were inversely related.

Source: Tradingview, City Index

Many thought that crypto currencies would be the “digital gold” and that money would flow there as a hedge to stocks.  However, BTC is down 25% TODAY, trading below 5900.  The same reasoning that is applied to gold as can be applied to Bitcoin.  When investors need to raise cash, they will sell other assets to meet margin calls in stocks.  BTC broke through strong support today, and below the bottom trendline of the long-term symmetrical triangle.  The correlation coefficient between Bitcoin and the S&P 500 is +0.90!  This means the 2 assets are moving together 90% of the time!

Source: Tradingview, City Index

On extreme days like today when fear and greed rule the markets, technical don’t matter.  There are three things I would add:

  1. TRADE SMALLER SIZE TO COMPENSATE FOR THE VOLATILITY.
  2. USE STOPS.  
  3. PRESERVATION OF CAPITAL IS KEY.  MAKE SURE YOUR ACCOUNT IS AROUND TOMORROW TO TRADE ANOTHER DAY!  

Even as stocks continue to trade lower, the traditional hedges aren’t there today.  Practice safe trading!


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