The Week the "Fear Trade" Died

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

After a mid-week wobble, stocks managed to finish the week in the black, with the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) gaining 0.8% and 1.1%, respectively. However, there was one shiny yellow casualty for the week, gold, which reinforces my belief that the "fear trade," which had investors seeking a safe haven in the yellow metal, is moribund.

In theory, this should have been a banner week for gold, for two reasons:

First, on Wednesday, the White House nominated Janet Yellen to succeed Ben Bernanke as chair of the Federal Reserve. Yellen is thought to be a policy dove and while that's a narrow characterization, there is no arguing that, as vice-chair, she has pushed the Fed to adopt unconventional policy measures, including an ambitious expansion of the central bank's balance sheet through massive bond purchases ("quantitative easing"). Ms. Yellen's nomination can't have done anything good for the anxiety level of "hard money" types.

Coincident with Ms. Yellen's nomination, fear of a technical default by the U.S. on its debt peaked on Wednesday. That's the second factor that ought to have pushed gold higher – it certainly took its toll on stocks.

Here's what actually happened: Despite the catalysts described above, the price of gold actually declined, along with stocks, on Wednesday! Witness the following chart comparing this week's performance of the SPDR S&P 500 ETF (NYSEMKT: SPY  ) and the SPDR Gold Shares ETF (NYSEMKT: GLD  ) :

GLD Chart

GLD data by YCharts.

It's not as if fear was absent from the market. The cost of hedging a stock portfolio vaulted higher during the first three days of the week, with the CBOE Volatility Index (VOLATILITYINDICES: ^VIX  ) gaining 22% through Wednesday. The VIX, Wall Street's "fear index," is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.

In the last week of July 2011, which preceded a solution to the previous round of debt ceiling bickering, gold rose 2%. However, the world was different then and so was sentiment concerning gold, which would go on to set a record nominal high above $1,900 less than six weeks later. The "fear trade" that consists of going long gold is now dead and it will be many years before we see gold near that level again.

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Related Tickers

9/27/2016 4:45 PM
^DJI $18228.30 Up +133.47 +0.74%
^VIX $13.10 Down -1.40 -9.66%
Volatility S&P 500 CAPS Rating: No stars
GLD $126.62 Down -0.93 -0.73%
SPDR Gold Trust CAPS Rating: **
SPY $215.57 Up +1.33 +0.62%
S and P Depository… CAPS Rating: No stars