Since the Match 2009 bottom many correlations have held extremely well. We covered one in a previous post titled “US Dollar Correlation Breaking Down” and other ones here. We can now add one more broken correlation to the mix. TIPS and GOLD have been trading very much inline with each other over the last nine months or so. The primary reason for the correlation is that since they are both seen as inflation hedges they should trade together.
As you can see in the chart below gold and TIPS have trade very much in line for most of the last nine months. Over the past two weeks however the two instruments have diverged with TIPS going higher and gold going lower.
GLD-Gold ETF and TIP-TIPS ETF
So the big questions are why are these diverging and how can we make money from it. You irst have to decide if you think inflation is going up or down and if you think TIPS and Gold are good inflation hedges. If gold is a good hedge and you think that inflation is going to increase then you would want to be a buyer of gold. If you think that inflation is set to decrease or that inflation expectations are overdone then you would likely want to short TIPS. The other main way to trade this is to bet on a convergence and a return to correlation. To take advantage of this you could buy gold and short TIPS.
Disclaimer-No positions in the securities mentioned.