For the past three months gold bulls have been wondering where the demand was?  Why wasn’t gold acting as the safe haven asset it should be as the markets began an epic flight to quality into U.S. and Japanese treasury bonds?  The short answer, of course, is that so much of the market is made up of people who cannot or will not buy gold.  CFO’s, pension fund managers, etc. are either not allowed to buy gold or know they would be fired on the spot if they did so. 

Gold is not a part of the average U.S. financial professional’s lexicon and it won’t be right up until the moment when everything changes.  I track gold using an indicator that anticipates the inflation expectations of bond traders and money managers. It has been screaming for months that gold should be rising and, time and again, it didn’t.  The disconnect at times has been nigh onto biblical. 

I mentioned this when gold touched $1525 on May 16th.  Since that day Gold and the iShares Barclays 20+ Yr Treasury Bond ETF (AMEX:TLT) have traded in sympathy, signaling a return of gold to its safe haven status.   Year to date TLT has outperformed GLD 7.5% to 3.62%

With the abysmal Non-Farm Payroll number from the BLS and going into a Friday morning with no rumor or discussion of how the EU was planning on calming the markets with respect to a possible exit by Greece, Gold exploded past resistance at $1570 per ounce and closed the week at $1625.65. 

This was a very rare 4% move in the price of gold, reflected in the 3.88% move in the SPDR Gold Trust ETF (AMEX:GLD), which nearly always mark some turning point in the market.  The last time this occurred was on February 29th when the market turned after the release of the FOMC minutes and gold sold off more than $100 in an hour. 

Since that day all rallies in gold have been sold.  Intraday volume was extremely heavy with 130.55 million ounces trading hands during New York trading.  This was 30% higher than the volume recorded during the spike low on May 23rd, of 101.43 million.
Was there a confluence outside factors in this?  Did bilateral open trading between the Yuan and the Yen have any effect on gold trading?  We know the Chinese have been strong buyers of gold along with a number of other central banks. What we do know is that as we approach the halfway point for the year, Gold is now outperforming both the SDPR S&P 500 ETF (AMEX:SPY)  for the first time since February 29th. 

The flight to quality has pushed the 10 year TIPS yield this week from -0.38% to -0.59%.  Credit Default Swap spreads on U.S. treasuries broke out to 49.22 basis points after more than a week of trading between 47 and 48.5 basis points.   The OIS swap rate is showing no signs of moving past 0.16% which means to me that the Fed is supplying the needed liquidity to keep the interbank market calm while the situation in Europe resolves itself.