By: Rachel Koning Beals – News Editor Marketwatch

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Gold’s sharp decline over the past month serves as little surprise to the investors who want the asset to perform in just this fashion-that is, as an alternative to assets perceived as risky, like stocks.

They’re betting that the opposite will be true as well, that gold will resume its role as protector and diversifier, even inflation hedge, when what they see as bloated price-to-earnings ratios, heavy debt-to-GDP ratios among major economies and hints of higher inflation finally catch up to the stock market.

“Sure, the opportunity cost of holding gold given where stocks are isn’t great, but the long-term reasons to own gold are just as real as they were months ago, as a store of value with low correlation to stocks,” said Adam Strauss, CFA, with Appleseed Capital.

Metal

For now, gold bulls have had to watch with some anxiety as gold prices GCQ8, +0.51% GCZ8, +0.48% plunged last month to their lowest level in nearly a year-notching a settlement as low as $1,224 an ounce at one point, and even grazing a $1,210 low in intraday action, in the futures market. That settlement marked gold’s entry into correction territory, or down more than 10% from its peak on Jan. 15 at $1,362.90. Gold futures have now fallen on a weekly basis for three weeks in a row.

Neither stocks nor gold have strictly followed the presumed rules in recent weeks as the threat of a full-scale trade war took root as the U.S. threatened to enact tariffs against China and the European Union and these trading partners responded in kind. Risk-on markets barely registered alarm; the S&P 500 index SPX, +0.35% has gained 3.6% so far in July. And gold, often serving as even a short-term haven stash when geopolitical and global economic worries flare, was largely ignored for this use; it’s on track to shed 2.5% this month and is down about 6.6% in 2018 to date. True, the stock-gold inverse relationship held, just not as expected.

However, there is another inverse relationship that is played out much as expected and that too restores gold holders’ confidence that the metal’s descent isn’t all that worrying. The trade-war worries elevated the U.S. dollar to haven status among currencies, markedly against China’s yuan CNYUSD, +0.3896% (see the following chart). A stronger dollar can make commodities priced in the currency, such as gold, more expensive to investors using other monetary units, thus cutting demand for gold.

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After declining by 9.8% during 2017, for the steepest annual fall since 2001, the ICE dollar index DXY, -0.26% again started the year on the back foot. But since a mid-April nadir, the DXY, as the gauge is sometimes referred, has rallied by about 6%. Gold’s near-term fate may remain tied to the dollar, but there is little shock or surprise in that.

Part of gold’s drop has been because of a tainted association to commodities in general, a relationship that will presumably mean less to investors if and when they’re spooked back toward the shelter of the yellow metal if stocks retreat.

“While gold’s commodity function (jewelry) is not central to our monetary investment thesis, the fact remains that gold is a key component of most commodity indices. In fact, gold is currently the single largest weighting in the Bloomberg Commodity Index, at 9.32%. In the very short run, therefore, gold is not immune to the magnetic pull of displacements in the commodity complex,” said Trey Reik, senior portfolio manager with Sprott Asset Management.

He points to July 11, a particularly sharp daily drop for copper prices and even steeper declines for the Bloomberg Commodity Index since 2014. Base metals broadly fell 3%-plus that day, when gold comparatively fell a little more than 1%, a gap that “serves as a testament to gold’s non-correlating profile,” he said.

“We view gold’s early summer performance as incremental evidence of bullion’s true portfolio utility,” Reik said. “Gold is not a magical elixir, but it is a fiercely reliable store of value.”

Reik is w