SP 500 and Gold: Indications of a Carry Trade

This chart compares the recent performance of Gold and the SP 500 in their twelve week moving averages of year over year change.

We use positions in gold to hedge movements in the SP 500. The nature of their inversion could be attributed to a 'flight to safety' position for gold, or the use of gold as an instrument of the carry trade as are the yen and the swiss franc.

The flight to safety notion is easy to understand and relatively well established.

The idea of the carry trade is that gold, like the yen and the swiss franc, can be borrowed for a nominally low interest rate and then sold, with the proceeds being invested in other instruments. In the case of the yen and the swiss franc their government bonds have notoriously low interest rates. In the case of gold, the central banks lease their gold to private parties at very low interest rates and then those parties sell the gold, and use the proceeds.

It will be interesting to see the strains that occur in this end of the carry trade since the largest supply of readily available gold is being held by the central banks themselves. Where will the large traders go when they need to 'pay back' the gold which they borrowed and sold?

This is the czse one can make that the central bank gold sales, including those of the IMF, are really being conducted to allow the large trading banks to cover their short gold positions to the central banks themselves!