This Looming Market Risk Could Spell Trouble for Gold – and Investors Are Missing It

As market volatility looms, investors should be cautious about their gold holdings, as certain intermarket dynamics signal growing risks. Market analyst Michael A. Gayed brings attention to a critical factor that could lead to a downturn: the “yen carry trade.”

Market Conditions Indicate Volatility

After weeks of erratic stock prices, the Cboe Volatility Index (VIX) remains significantly above historical norms, indicating that the market is currently driven more by volatility than by stable trends. Investors typically retreat to safe-haven assets during times of uncertainty. However, even traditionally reliable assets like U.S. Treasury bonds have been rendered less dependable as they become political tools within the context of ongoing trade tensions under the Trump administration.

The rising yields on Treasuries—which should typically act as a safe haven—are a result of decreased demand stemming from governments selling off Treasuries amid political instability. Compounding these issues is the declining value of the U.S. dollar against international currencies, particularly as President Trump publicly questions the position of Jerome Powell as chair of the Federal Reserve, further adding unpredictability into the equation.

Gold: The Overcrowded Trade

In the face of market uncertainty, gold has emerged as a popular alternative. Gold prices have soared this year, but Gayed warns that this increase may have made the yellow metal an overcrowded trade. With stocks, bonds, and the dollar all showing signs of trouble, investors must be wary of the interconnectedness of these financial instruments.

The Risk of the Yen Carry Trade

The primary concern for investors now revolves around the yen carry trade—a strategy that has previously led to significant market corrections. Last summer, a surprise interest rate hike by the Bank of Japan (BOJ) led to a strengthening of the yen against the U.S. dollar, causing traders who had borrowed yen at lower rates to rush to unwind their positions. This triggered a notable correction in U.S. stocks, with the S&P 500 experiencing a 10% drop.

Currently, the yen is once again hovering around the psychologically significant 140 yen to U.S. dollar level. If the BOJ implements further rate increases, this could pressurize short-yen positions, triggering similar selling of risk assets like U.S. equities. Given that the stock market is already facing headwinds, the likelihood of a significant unwinding of these positions could further exacerbate losses.

Why Gold Could Lose Its Luster

Additionally, the usual correlation between the dollar and Treasury yields appears disrupted. While the dollar weakens, Treasury yields are rising—a disconnect that raises concerns about further downside risk. With the potential for a selloff in equities exacerbated by rising inflation fears and recession concerns, margin calls could lead investors to liquidate holdings, including gold—the very asset that has garnered attention as a safe haven this year.

The disposition effect, a behavioral finance concept, may exacerbate this scenario. Investors tend to sell winning assets while holding onto losing ones out of loss aversion. With gold being a notable performer in the market thus far, any forced selling due to margin calls could initiate a downward trajectory just as investors have begun to accumulate positions.

The Role of the Federal Reserve

Given the precariousness of the financial landscape, the U.S. Federal Reserve may find itself pressured to implement measures to stimulate the economy and maintain liquidity. As the pace of quantitative tightening slows, speculations arise that the Fed could transition to a quantitative easing stance if the bond market remains destabilized. In this environment, gold could decline in value, with U.S. Treasuries, particularly longer-term debt, emerging as the preferred safety valve.

Conclusion

Market apprehension is palpable as investors weigh the implications of multiple interconnected risks. While gold has historically served as a safe haven, current circumstances driven by volatility, rising interest rates in Japan, and political uncertainty present a unique set of challenges. For long-term investors, it may be prudent to consider Treasuries over gold in these unpredictable times.