Gold and the US dollar are no longer behaving normally and it's crucial that investors pay attention to this move, Raoul Pal and Grant Williams said during a discussion about the Brexit on Real Vision Television—a subscription financial news service they cofounded.
Gold is widely considered a hedge against the US dollar. When the dollar falls in value, gold prices often rise. However, this relationship has been breaking down.
Pal, a former macro fund manager and author of the research letter “The Global Macro Investor,” recently said that a dollar rally along with a gold rally is “a sure sign that almost everything has changed.”
Williams, the author the research letter “Things That Make You Go Hmmm,” agreed that it’s a “sign that there’s some move toward an end game of sorts.”
Following the stunning Brexit vote last week, investors simultaneously piled into gold and the US dollar, which are both considered safe-haven assets in the international financial markets. Both gold and the dollar have rallied.
For gold and the dollar to move in the same direction is not normal. It’s actually a sign of uncertainty or financial stress.
“It doesn’t happen often, but when it does it’s a sure sign people are nervous—saw it in 2008, saw it in the 30s. It’s a sign we are at a point of critical stress,” Williams told Yahoo Finance in a phone interview.
“It is a big deal. It’s a very rare occurrence,” Pal also told Yahoo Finance.
Pal continued: “This never happens…It’s a dark sign. People are forced to buy dollars because of the global carry-trade. They want to own gold because in a negative interest rate environment—if your interest in Germany is -1%, you’re better off to own gold.”
It's actually what legendary hedge fund manager Stanley Druckenmiller, who historically has never been a really big gold investor, was talking about at the Sohn Conference in May.
"My hint is what is the one asset you did not want to own when I started Duquesne in 1981? It’s traded for 5,000 years and for the first time has a positive carry in many parts of the globe as bankers are now experimenting with the absurd notion of negative interest rates. Some regard it was a metal. We regard it was a currency, and it remains our largest currency allocation," Druckenmiller said.
Pal, a Goldman Sachs alum who also ran GLG’s macro fund, thinks owning both the dollar and gold is “very attractive.” He added that the downside is “very limited” given that traditionally when the dollar goes down, gold goes up. The upside is that they both go up.
Pal also expects that gold and industrial metals will diverge.
Pal and Williams discuss the Brexit in this wide ranging conversation available on Real Vision.
Julia La Roche is a finance reporter at Yahoo Finance.