Gold Is Back

NEW YORK (TheStreet) -- As investors sought a safe haven from falling markets last week, the yield on the 10-year Treasury note (which moves in the opposite direction of the price) hit a record low going back to the 1950s, at 1.45% [Figure 1].

Fortunately for investors, as Treasuries became the most expensive they have ever been, another safe haven emerged last week that had been lost to investors seeking safety in recent years: precious metals.

While historically acting as a refuge for investors during stormy markets, gold prices have been driven by multiple factors including the demand from China and India in recent years. This has resulted in a departure from gold's former role as a defensive investment.

Gold has tracked the ebb and flow of global growth, especially growth in Asia, in recent years. For example, gold plunged 30% from mid-March to mid-November of 2008 (according to Bloomberg data), as the global financial crisis emerged, offering investors little safety from the similar decline in the stock market. Furthermore, this year gold prices tracked the slowdown in China's economic growth, moving down in lockstep with China's Leading Economic Index as key data releases reflected slowing growth and missed economists' estimates.

But that behavior changed last week as gold prices rose despite weak global economic data, including data from China that pushed bond yields lower (and prices higher), as you can see in Figure 2. The release on Friday, June 1, of China's PMI, a widely-watched manufacturing gauge for China, was surprisingly weak and registered a sharp pullback to 50, the threshold between a growing and shrinking manufacturing economy in China. Investors began to look at gold as a safe haven again rather than a barometer of global or Asian economic growth.

Gold had fallen 19% from early September of last year until mid-May 2012 as the price in dollars per troy ounce fell from 1900 to 1540, nearly making it a bear market for the precious metal. Since May 16, 2012 gold is up 5.5% with most of that gain, 4 percentage points, coming on Friday, June 1 as stocks, as measured by the Standard & Poor's 500, fell 2.5%.

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