What Gold’s Shocking Reversal Tells Us About the Stock Market
Gold's breakout to seven-year highs was short-lived as Iran and the United States showed restraint following a brief flare-up in Iraq. | Image: REUTERS/Ilya Naymushin/File Photo
- Gold dropped 4.4% within two days, showing unusually high volatility.
- At the same time, the U.S. stock market recovered strongly as investors’ fears dissipated.
- Investment firms expect the Fed to cut rates again in 2020, which would catalyze stocks.
The price of gold has plunged 4.4% within a two-day span, demonstrating a steep reversal from a strong extended rally. Its pullback coincides with the recovery of the U.S. stock market after both Iran and U.S. mutually agreed to deescalate.
The stock market rebounded after U.S. President Donald Trump confirmed that there were no casualties from Iran’s firing of missiles targeted at military bases in Iraq.
Gold’s Drop Alleviates Pressure on U.S. Stocks
Up until Jan. 6, strategists expressed concerns towards the upside movement of gold.
CNBC’s Jim Cramer said that if gold continues to rally, it would further fuel the downtrend of the stock market, especially if it surpasses $1,600 and heads towards higher resistance levels.
The rejection of gold at $1,600 indicates that bullion is not ready for a vertical rally to the $1,700-$1,800 range.
It also indicates that fears of investors surrounding the conflict between the U.S. and Iran has subsided , as shown in the performance of Asia’s stock market.
South Korea’s KOSPI surged 1.6% and Japan’s Nikkei 225 spiked 2.3% following Trump’s statement on Iran.
Majid Takht Ravanchi, the ambassador of Iran to the UN, told Al Jazeera that Iran is also not interested in further increasing tensions between the two nations. He said:
Increasing the tensions in the region will not be in the interest of anybody, so Iran definitely would like to have peace established in the neighborhood and the first ingredient for peace in the region is the removal of the forces, the American forces, from our region.
For Iran, the missile attack on U.S. bases was an appropriate response to the targeted killing of General Qassem Soleimani. For the U.S., no American casualties were recorded from the missile strikes, which means that the retaliation initiated by the Iranian government did not directly cause harm to American interests, assets, or people.
As such, it’s appropriate timing for both countries to back down , deescalate, and even potentially open dialogue.
The stock market reacted positively to the statement of President Trump because investors seem to believe that the conflict between the U.S. and Iran is likely to subside in the short-term.
Hu Xijin, the editor in chief at Global Times, known to have a similar editorial stance as state-owned newspapers in China, said President Trump’s decision to deescalate showed courage and wisdom:
Between Iranian missile strikes and no American casualties, President Trump chose to stress the latter this time. I think this choice demonstrated courage and wisdom.
Where are Markets Headed?
In the aftermath of the Middle East crisis, expectations of an additional rate cut by the Federal Reserve in 2020 have started to increase.
Philip Marey, senior U.S. strategist at Rabobank, said told Bloomberg that the Fed could slash interest rates to zero by year’s end.
The stock market has not been pricing in an extra Fed rate cut based on CME futures data, and an additional catalyst could re-ignite momentum for stocks.
