As volatility ravages the stock market, it is no surprise that demand for safe-haven assets is soaring. The controversial godfather of defensive assets, gold, has outperformed the S&P 500 year-to-date, and it’s undoubtedly no coincidence. Traditional anti-equity plays like the Japanese yen, Swiss franc, and government bonds are also in multi-week bull trends while bitcoin too has started to show glimpses of haven qualities.

Gold Outperforms the Stock Market as Trade War Weighs on Equities

The value of Gold (XAU/USD) is up over $200 since July and appears to be driven by an escalating trade war between the U.S. and China. The S&P 500 has gone virtually nowhere since President Trump first imposed tariffs on China in January 2018, and the lack of progress has gold bugs scurrying for cover. This has left XAU/USD posting overbought readings on many technical indicators.

Despite the possible rising demand for safe-haven gold, bearish risks could be mounting for XAU in the retail sector. In a round-up with the outlook for precious metals, Robert Parnell, Chief Economist for the Asia Pacific region, notes possible risks mounting in the crucial Indian market:

“Central banks are also likely to keep up with their gold purchases in 2H19, as the escalating political/trade uncertainty pushes countries to diversify assets. However, higher gold prices do pose a demand risk to the retail segment, especially in the Indian market where affordability remains a major concern for gold buyers. In fact, India’s gold imports dropped 55% YoY to a three-year low of 39.66t in July due to higher prices and liquidity constraints in the financial market.”

Central Bank Easing Fails to Lift S&P 500, Boosts XAU

The Federal Reserve’s dramatic shift to an easing bias with the first U.S. rate cut in a decade has so far failed to lift the S&P 500. As other central banks join in the effort to loosen financial conditions, gold’s reputation as a hedge against inflation has become more compelling. New Zealand’s decision to slash rates 50bp to record lows was the perfect example of an event that might trigger gold bulls, and the market has clearly responded.

Bitcoin’s Rise Puts Gold Under Scrutiny

Gold bubbles are good and easy to short. — Dow (@mark_dow) August 7, 2019

After Fed Chief Jerome Powell raised the concept of bitcoin as a possible competitor to gold as a store of value, XAU’s fundamentals as a haven have been put sharply into focus. Bulls will also do well to remember the historical precedent that during the peak of the great recession in 2008, gold initially fell in value. Short-term investors remain hopeful that things will be different for gold the next time a recession hits.

For now, the positive correlation with a falling S&P 500 is intact, and gold is back in fashion.