Gold and stock markets usually move in the opposite direction as investors flee from the risk assets (S&P 500) to safe havens (Gold) during times of uncertainty.
Gold topped out in July 2016 as the S&P 500 and other major indices across the globe quickly recovered from the Brexit dip. On similar lines, Trump victory was followed by an extension of the rally in the S&P 500 and drop in the yellow metal.
Gold dropped to a low of $1122 in December as the US stocks continued to march higher. However, the inverse correlation weakened in late December and the yellow metal started tracking the S&P 500 higher in the subsequent days.
Following could be the reason for the rally in gold despite record highs in S&P 500
Dollar Index: The DXY retreated from the high of 103.81 to 99.84 during the last few weeks. That could have aided the rally in gold. However, it worth noting that the treasury yields traded in a sideways channel, despite which the metal has rallied from $1122 to $1245 levels.
Rising inflation expectations: Gold has had a strong positive correlation with the 10-year breakeven inflation rate and the 5Y 5Y forward inflation expectations. However, the yellow metal had failed to rally despite the sharp rise in the inflation expectations since November. The metal appears to have done a ‘catch up job’ with the rising inflation expectations.
Trump uncertainty: President Trump delivered on all the hard promises made during the presidential campaign… criticism of German, Japanese and Chinese trade policies, talking down the US dollar, ordering wall on the Mexican border… all heightened odds of a global trade war. The rise in the uncertainty pushed up the safe haven demand for the yellow metal.
Fiscalism is inflationary: The switch from Monetarism to Fiscalism is inflationary. This is because, aggressive monetary easing helps nations steal (import) foreign demand, while aggressive fiscal policies (e.g. Infrastructure spending) boosts domestic demand. Moreover, the money enters the real economy rather than the financial markets.
Technical factors: Gold ended the three-year losing streak after ending 2016 higher at $1150.62 levels. Moreover, the positive close was despite heightened odds of a faster Fed policy tightening under Trump Presidency. Thus, the turnaround brought in technical buyers.
Road ahead
Gold could drop on massive tax cuts and fiscal spending program in the US, however, the dip could prove to be short lived as rising inflation expectations are likely to pull up the yellow metal in the long run. Furthermore, record rally in stock markets could also force investors to allocate a small portion of their money to gold (hedge demand).
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended Content
Editors’ Picks
EUR/USD clings to daily gains above 1.0650
EUR/USD gained traction and turned positive on the day above 1.0650. The improvement seen in risk mood following the earlier flight to safety weighs on the US Dollar ahead of the weekend and helps the pair push higher.
GBP/USD recovers toward 1.2450 after UK Retail Sales data
GBP/USD reversed its direction and advanced to the 1.2450 area after touching a fresh multi-month low below 1.2400 in the Asian session. The positive shift seen in risk mood on easing fears over a deepening Iran-Israel conflict supports the pair.
Gold holds steady at around $2,380 following earlier spike
Gold stabilized near $2,380 after spiking above $2,400 with the immediate reaction to reports of Israel striking Iran. Meanwhile, the pullback seen in the US Treasury bond yields helps XAU/USD hold its ground.
Bitcoin Weekly Forecast: BTC post-halving rally could be partially priced in Premium
Bitcoin price shows no signs of directional bias while it holds above $60,000. The fourth BTC halving is partially priced in, according to Deutsche Bank’s research.
Week ahead – US GDP and BoJ decision on top of next week’s agenda
US GDP, core PCE and PMIs the next tests for the Dollar. Investors await BoJ for guidance about next rate hike. EU and UK PMIs, as well as Australian CPIs also on tap.