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Why the Gold Price Is Surging Despite Record High U.S. Stock Market

Last Updated September 23, 2020 1:24 PM
Joseph Young
Last Updated September 23, 2020 1:24 PM
  • Gold’s price is on the rise despite record high numbers from the U.S. stock market.
  • Up until the third quarter, gold was considered overbought based on some technical indicators. Stability in the market is making gold more favorable.
  • Gold’s rally indicates investors still see big risks in the global market regardless of the U.S.-China trade deal.

The gold price has nearly fully recovered from a short-term drop to $1,450 in early November. The recovery of the safe haven asset casts doubts on the sustainability of stocks, which surged to record highs on Monday.

When the stock market rallies, gold often trends in the opposite correction. The rare simultaneous upsurge of gold and the stock market shows just how uncertain investors are in the short-term trend of the global market.

Investors are not convinced about the phase one trade deal

The rise of gold alongside stocks indicates that many investors are still not convinced by the phase one trade deal between the U.S. and China. Specifically, it shows that investors are questioning the extent to which the agreement can positively affect the U.S. economy in the imminent future.

The deal crucially prevented the imposition of Dec. 15 tariffs  by both the U.S. and China but strategists do not necessarily foresee improvement in business confidence. The overall sentiment around gold is that the trade-deal breakthrough is not a sufficient reason to lead investors to bet against bullion in the near-term.

Bullish macro trend

In recent weeks, medium-term predictions for gold have been ranging from $1,700 to $2,000.

The optimistic macro trend of gold stems from the correction heading into the fourth quarter of 2019.

Gold price
Gold price has recovered from its fall to $1,450 in the past three weeks. | Source: Tradingview.com

According to Wolfe Research, gold was highly overbought until the end of the third quarter . Since then, it has reversed the overbought measure, establishing a more neutral ground for recovery.

The report published on Dec.16 read:

It may not be especially evident because gold’s been in a 2%, or so, range since early November but it is (a) building / basing on our work and (b) our momentum indicator (chart here) has turned up from an oversold level.  Prior turns, and there have been 7 of them, show gold rallying, on average, 15% over nearly 75 days with a median gain of 14% over 83 days.

Imminent risks make gold attractive

Throughout the past week, strategists have said that the trade agreement between the U.S. and China is overvalued .

The assumption that the deal automatically improves all fundamentals supporting the stock market is flawed, and it merely increases the probability of preventing more pain for export-oriented industries.

The strong recovery of gold shows that investors are not willing to consider that all risks in the global market have been eliminated. It also shows that investors are actively hedging their holdings as Fear of Missing Out (FOMO) begins to hit the markets.