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What Gold’s Massive Rally Tells Us About the Stock Market

Last Updated September 23, 2020 1:15 PM
Joseph Young
Last Updated September 23, 2020 1:15 PM
  • Gold and stocks are rallying in lockstep with each other.
  • Appetite for gold is driven by safe-haven demand despite surging stock prices.
  • Analysts believe the gold bulls still have the upper hand in 2019.

This week, the S&P 500 achieved a new all-time high  following a positive jobs report. Yet, the gold price has approached levels unseen since 2013.

Gold, along with traditional safe haven assets like bonds, have continuously been on the rise  over the past two weeks, amidst fears of a possible recession despite the strong performance of the equities market.

The upside momentum of gold  during an extended stock market rally indicates that investors are not fully convinced fundamental issues including geopolitical risks are resolved.

Why gold is rising amid S&P bull market

According to Citigroup investment strategist Ken Peng, the stock market selloff of Q3  was caused by an overreaction from investors.

Peng noted that investors feared slowing global economic growth , Brexit and the trade war, which added to international geopolitical risks and led to an increase in demand for safe havens.

He said:

“Investors were panicking about the trade war, global growth and Brexit in the summer and now they realized the situations aren’t that bad. I’d recommend investors to focus more on equities and high-yielding bonds in the coming three to six months.”

Hence, the recent momentum of the S&P 500 and the rest of the U.S. equities market has been widely attributed to the outflow of capital from the bond market as recession fears cooled .

gold price
The gold price has increased by more than 7% in the past two months in spite of S&P rally. | Chart: tradingview.com

However, the rising gold price suggests that while investors are moving towards riskier investments, they are not disregarding the possibility of a selloff in the markets .

Gold bulls have the upper hand: investment firm CEO

Following a 7% increase in price within merely two months since August, Scott Bauer, CEO at Prosper Trading, told Bloomberg that gold bulls have the upper hand  in this market.

According to Bauer, multiple Fed rate hikes and the gradual unwinding of the U.S. dollar have created an ideal environment for gold to spike.

He said:

“The Fed just cut rates again and signaled unless inflation picks up, the likelihood of any rate hike is not in the cards. Bond yields have been ranged bound and the dollar has declined off of its recent highs. The lower interest rates go, the more valuable gold becomes as the only true store of wealth.”

With key markets in Asia like China, Hong Kong, Japan, and South Korea struggling to recover from third-quarter woes , the gold price could sustain its upward trend in spite of the S&P momentum.