Gold prices are surging because the economy is in trouble. That scenario doesn’t bode well for the Dow Jones.
Gold investors have reasons to cheer. The price of gold climbed to an all-time high on Monday, rising above $1,940 per ounce.
Gold has gained almost 30% this year. The party should go on for a long time, as Bank of America foresees the yellow metal going to as high as $3,000 per ounce over the next 18 months.
Investors are pouring their money into the precious metal amid fears over the pandemic’s impact on the global economy and worsening tensions between the United States and China. Falling returns on U.S. government bonds and a weaker dollar are also driving the yellow metal higher.
Mark Mobius, co-founder of Mobius Capital Partners, said in a Bloomberg TV interview:
When interest rates are zero or near zero, then gold is an attractive medium to have because you don’t have to worry about not getting interest on your gold. I would be buying now and continue to buy.
This is not the first time that gold has received aid from central bank stimulus programs. From December 2008 to June 2011, the Federal Reserve bought $2.3 trillion in debt and kept borrowing costs near zero to support growth. Those efforts helped send gold to a record high of $1,921.17 in September 2011.
The gold rally signifies that the economy is in trouble, which is terrible news for the Dow.
Rising virus cases and death spikes are threatening the fragile recovery. The economic recovery is slowing as lockdowns resume in many states.
After declining for four months, unemployment claims are on the rise again. There are fears that the expiration of the additional $600 in unemployment benefit will deal another blow to consumer spending. Lower-income workers will feel the hit the most.
In a Reuters survey, economists have warned that any job gains are about to be erased as virus cases topped 4 million in the United States last week, with reports of more than 2,600 new cases per hour, the highest rate in the world.
Almost 60% of economists said the risk that the employment recovery will reverse by the end of this year was high or very high.
It’s unlikely that the U.S. economy can have a sustainable rebound as it tries to extricate itself from the worst losses since the Great Depression.
David Mericle, chief U.S. economist at Goldman Sachs, told Reuters:
The current situation presents two risks: Some states might need to shut down more consumer activity to get the virus under control, and the stall in the reopening process might cause longer-term damage to businesses and the labor market.
Two-thirds of economists said it would take two or more years for the U.S. economy to reach its pre-pandemic levels.
Increased risks to the economy are positive for gold but not for the Dow. Investors will pour more money into gold as the economy crumbles since it’s a haven asset.
A slower recovery could halt the Dow rally, which has lost steam in recent weeks.
The stock market valuation seems too high relative to the uncertainties.
Long-time market bull Ed Yardeni warned that new risks from the virus surge and increased tensions with China could trigger a 20% to 30% meltdown.
The Dow, meanwhile, has rallied on hopes that a vaccine will become available soon. CNBC’s Jim Cramer says gold’s move higher is a sign that a vaccine will fail and that central banks will continue to print money to support the economy during the crisis.
The Dow will need other catalysts to go higher.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned securities.