The relation of gold to US treasuries, the US Dollar and equities have changed with the precious metal behaving like a risky asset rather than a safe haven.
Gold has been losing its safe haven status to US treasuries with the yellow metal prices falling substantially from the all-time high and treasuries staying steady. In times of crisis and inflation, gold prices shoot up along with treasuries and the US Dollar. Sometimes the US dollar and gold move inversely, but treasuries and gold tend to move up in tandem. The other co-relation is that gold tends to move down when equities move up.
Let us look at the chart of gold compared to treasuries.
We are using the gold exchange traded fund (ETF) GLD as a proxy for the precious metal and 20-year treasury bond EFT, TLT, for US securities. The chart shows that while prices of gold have fallen and gone into a downtrend channel, prices of TLT have held steady. This shows that investors prefer US treasuries over gold at least for now. One of the factors for the fall in gold is that Fed has stopped quantitative easing, which means more money is not being pumped into the system. Additionally, with operation twist the Fed is keeping long term interest rates low which keeps bond prices high.
The relationship between the US Dollar and gold can be rocky. Sometimes they dance together and sometimes they go their separate ways. When the market faces a high degree of risk aversion, gold and the dollar tango and rally. However, if there is no panic in the markets, a rise in the dollar often leads to a fall in gold. Over the past few months that's exactly what has happened. The dollar has rallied pushing gold down.
However, the most interesting factor of is the complementary relationship between gold and equities. A look the chart shows the price movement of gold in the upper chart and that of SPY (the S&P 500 ETF) in the lower one.
The turning points are marked by the green vertical lines. Notice that when the price of SPY rises so does that of GLD. Generally, a rally in gold prices results in a fall in equities.
Given the scrambled nature of the inter-market connections, gold bugs are confused about what to do. The best option is to trade gold based on what gold itself is doing. A look at the gold chart will show that gold formed what technical analysts call a bullish inverse head and shoulders.
Given the fact that gold broke out of the neckline, which is the signal to confirm the bullish pattern, it could all the way up to the levels marked by the horizontal red lines. If the first resistance zone is broken, prices can rally to the second one higher.
The best time to trade gold is when all the inter market connections work perfectly. However, if the connections are not working, one can trade gold based on its price alone. But in such a scenario taking a long term view on gold can be difficult and hence swing and intra-day trades are the better options.