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Explosive Gold Price Exposes Harsh Reality of Stock Market Rally

Last Updated September 23, 2020 1:54 PM
Joseph Young
Last Updated September 23, 2020 1:54 PM
  • Gold is working its way towards its record high, rallying in tandem with the stock market.
  • Rising demand for gold and Treasuries indicate that investors do not believe in the recovery of stocks.
  • The abnormal short-term trend of equities leaves high profile investors concerned about the future.

Gold is rallying towards its record high and Treasury yields are falling. Yet, the U.S. stock market is up 32% since March 23, as euphoria continues to build up with equities investors.

As the Q2 earnings season approaches, the stock market is projected to see a steep fall. The overwhelming majority of major corporations adjusted their revenue guidance to the downside, signaling lower business productivity .

Stocks increased throughout the past month as a result of optimism towards reopening the economy. But, as scientists warn that coronavirus is likely seasonal , the stock market bubble is at risk of bursting.

Gold’s rally exposes weakness in U.S. stock market rally

The demand for gold is continually rising while central banks scramble to introduce more stimuli to boost the economy.

Gold outperforms most assets, including reserve currencies | Source: Ronnie Stoeferle 

The significant increase in the price and volume of gold shows that investors are rushing to gold to store their wealth. If investors are confident in a full economic recovery, the probability of gold rallying in tandem with stocks decreases.

According to Oanda market analyst Edward Moya, the stock market is rising  on the assumption that a “major breakthrough” is imminent in solving the coronavirus crisis.

But, it is premature to project  that economic activity in the U.S. will rebound in the next 12 months due to various uncertainties. For one, the U.S. government is yet to make its decision on reopening the economy.

Gold is clearly benefiting from the uncertainties that cloud the global economy. When the Dow Jones finds itself in a severe correction in the near-term, the risk of positive sentiment around the U.S. stock market drying up will intensify.

Technical indicators are beginning to suggest that the U.S. stock market is overheated. The Relative Strength Index (RSI) of the Dow Jones Industrial Average (DJIA) is nearing 70%. When the RSI hovers in the 70 to 75% range, it signals that the index is highly overbought.

dow jones
RSI of Dow Jones Industrial Average nears overbought levels | Source: Tradingview

“This stock market is a joke” says Dave Portnoy

Dave Portnoy, founder of Barstool Sports who runs a daily stock market show called Davey Day Trader, criticized the recent trend of U.S. stocks.

stock market
Dave Portnoy takes a jab at the U.S. stock market | Source: Dave Portnoy 

Portnoy noted that the stock market is increasing despite glaring macro risks and regardless of market sentiment.

He said:

Norwegian Cruise Line? I read what they did. They just fired everybody. They’re putting their ships in storage. You’re putting your cruises in storage and they’re up 20% for saying they’re firing people. What does that mean? This stock market is a joke.

Stocks are rising purely based on hopes that the U.S. will recover from coronavirus in the coming weeks and the efforts of the Fed.

The Fed’s aggressive approach to boost liquidity in the market is seemingly working. The concerns are that if the Fed uses up its tools right now when the coronavirus pandemic takes a turn to worse outcomes, the effectiveness of Fed’s stimuli is likely to drop.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. The author holds no positions in gold or its asset class.