Gold has garnered a lot of headlines over the last couple of weeks as it has broken through and is now hovering near $1000/oz. Tiring of the usual debate around gold/dollar or gold/inflation, I set out to look for something that may set this latest push up to $1000 apart from the others.
 
One of the supporting factors for gold has always been its draw as a safe haven. In the chart below I have plotted the spread (or relative strength) between gold and the S&P 500 (the black line) and the price of physical gold (the red dashed line). When the black line is rising, gold is outperforming the S&P 500. When the line is falling, gold is underperforming the S&P 500.
 
Notice the high correlation between gold outperforming the S&P 500 (the black line rising) when physical gold (the red dashed line) gains in value. This action backs up the assertion that money flows from equities (higher risk) into gold (safe haven) when traders and investors are nervous, and back into equities when the perceived danger has passed.
 
Now take a look at the right side of the chart. The ‘normal’ money flow scenario between gold and equities has not aided gold on this trip to $1000. Physical gold (the red dashed line) is hovering near its highs while the price of gold is underperforming the S&P 500 (the black line is moving lower). That means that gold is now moving higher without the usual inflow of funds from nervous equity holders. Recent headlines have China pegged as being accumulators of gold which likely makes China the source for this new buying as they look to diversify away from the U.S. Dollar. This new demand source means that gold could be on the verge of a major break higher should anything spook this market enough to induce the flow of funds from equities into gold.
 
Of course nothing is guaranteed in the markets, but this scenario bears close watching.