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Well, it's happening again. Over the past couple of trading sessions, the rolling 30-day correlation of gold to the S&P 500 Composite has turned positive. The correlation had been rising—actually becoming less negative—throughout the first two weeks of July. Then, on Friday, the correlation punched through to positive territory. In all, the coefficient's moved up 44 percentage points this month. Gold's Correlation To S&P 500 Composite 
For the nonstatistical among us, this may seem like a ho-hum event. After all, correlations fluctuate all the time (see "Appraising Gold Miners' Equity Risk"). Portfolio managers see this as an important development, though. For them, gold is a risk diversifier. At least it ought to be. If gold can't be relied upon to provide the "zag" for a portfolio's "zig," it loses utility. This month, money runners have been voting on gold's utility with their feet, liquidating positions on both sides of the market. For the week ending July 13, funds closed out 5,105 long contracts, or 2.6 percent of their bullish positions. Managers running funds with short positions also prepared to leave town, buying back 31.2 percent of their commitments, or 3,548 contracts. The bottom line is this: an increasing correlation begets increased risk. Fund managers who suffered through the market meltdown of 2008 appreciate this exquisitely when they recall how most every asset class hit the skids simultaneously. They're paring back on this risk. That's not to say that we're on the verge of another meltdown. By and large, though, money managers aren't willing to push their luck. [NOTE: There's still plenty of bullish gold sentiment in the funds. More than 96 percent of the total contracts held by money managers are long positions. You can look at this in one of two ways: It's either an abiding belief in gold's upside or an indication of a lot of selling yet to be done.]
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