- Gold is en route to test $1,800 and its rally are unnerving Dow Jones investors.
- Analysts say that if the gold upsurge continues, it can trigger FOMO and create a bad scenario for stocks.
- A pullback in 2020 was expected but it may come sooner.
The price of gold has spiked 7.5% within three weeks since late December and its strong rally is unnerving investors in the U.S. stock market. The Dow Jones Industrial Average (DJIA) dropped by 200 points since January 2 and is at risk of a short-term pullback.
The firm upside movement of safe-haven assets like gold amidst record high numbers in the stock market is unprecedented.
Why is gold move, in particular, a big factor for Dow Jones?
According to Peter Schiff, CEO at Euro Pacific Capital, the demand for gold in recent weeks has been fueled by the policies of the Federal Reserve and intensifying geopolitical risks.
Before the Middle East crisis, gold was already on an upward trajectory in spite of the upsurge of the Dow Jones heading into the year’s end.
That indicates that while increased geopolitical risks as a result of the conflict between the U.S. and Iran may have contributed to the gold rally, it is not the main cause of it.
The main reason gold is going up is because of the Fed. But in a world where you have heightened geopolitical risk, which could adversely affect bond markets and stock markets, you’d expect to see greater demand for gold as a hedge in your portfolio.
Like Schiff, CNBC’s Jim Cramer said that the sheer magnitude of the stunning gold rally suggests investors are fearful in the Dow Jones for the first time in a while.
Above $1,500, there are not many heavy resistance levels for gold to test at a technical level. As such, Cramer said that he fears gold is en route to test $1,700 and $1,800, which would be “very negative” for the Dow Jones.
2020 correction was expected but it may arrive sooner
Data showed that the expanding valuations of major companies in 2019 were not backed by an increase in earnings.
For that reason, many predictions of a steep pullback in the Dow Jones emerged in the final quarter of last year.
It would be far-fetched to claim that the market is pricing in a slower start to 2020. A Bloomberg study showed that many financial institutions in the likes of Barclays, BlackRock, and Aberdeen are optimistic for 2020 and the equities market.
Hence, there is a possibility that the continuous uptrend of gold triggers fear of missing out (FOMO) in the U.S. market, further pushing the demand for gold and adding to the decline of the Dow Jones.
Iran isn’t the big narrative
As pointed out by prominent commentator Mike Cernovich, the Dow Jones has climbed on Monday and the futures market is indicating a minor gain at open.
It suggests that the market is not anticipating a full-blown war with Iran to occur anytime soon to rattle the global financial market.
The two biggest narratives regarding the short to medium-term trend of the Dow Jones remain as the potential rate cut by the Federal Reserve and the stunning rally of gold.
Last modified: September 23, 2020 1:28 PM