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Why UBS’ $2k Gold Prediction Indirectly Hints at Stock Market Woes

Published September 29, 2020 3:27 PM
Joseph Young
Published September 29, 2020 3:27 PM
  • UBS, a top Swiss bank, expects the spot price of gold to hit $2,000 by the year’s end.
  • The gold price is hovering at $1,881 and an increase to $2,000 would mark a 6.3% rise.
  • The positive outlook around gold and the uncertainty around the dollar raise the probability of stock market woes.

UBS, the Swiss banking giant, expects the spot price of gold to achieve $2,000 by the end of 2020 . The precious metal tends to rise when the U.S. dollar declines. A continuously declining dollar presents a threat to the ongoing stock market recovery.

The precious metal is hovering at $1,881, and that would indicate a 6.3% increase in the fourth quarter. UBS’ regional chief investment officer Kelvin Tay said:

We like gold, because we think that gold is likely to actually hit about $2,000 per ounce by the end of the year.

For a haven asset, which has historically shown low volatility, a 6.3% increase is considered a strong bull case. 

Banks Might Be Indirectly Hinting at a Lower U.S. Dollar

Since its peak in March, the U.S. dollar index (DXY) has declined from $102.99 to $91.75 . The dollar’s 10% drop coincided with a steep stock market pullback.

The correlation between a strong dollar and a robust stock market uptrend dates back to at least 2002. 

From 2002 to 2007, the U.S. stock market massively underperformed against emerging markets. The U.S. dollar fell 34% in that period, coming off a major downtrend against other reserve currencies.

From 2011 onwards, U.S. equities outperformed emerging markets by over 8%. During that time, the dollar rose 24%.

stock market dollar dxy
The historical performance of the U.S. stock market amid a strong and weak dollar. | Source: MarketWatch, Factset 

There exists a clear historical correlation  between a strong reserve currency and the equities market. Since gold typically rallies when global reserve currencies fall, the rising gold price could hint at an impending stock market slump.

Tay told CNBC’s Squawk Box that election uncertainty and the pandemic could buoy gold’s outlook. Coincidentally, the same factors caused the dollar to lag the Swiss Franc and Japanese yen.

The investor further emphasized that gold’s recent pullback marks a compelling entry for investors:

And gold has certain hedges to it. In event of uncertainty over the U.S. election and the Covid-19 pandemic, gold is a very, very good hedge. And its recent weakness represents a great entry point for investors.

Gold comes off its worst weekly performance since the March crash. Watch the video below:

Persistent Narrative: Only Stimulus Could Trigger Dollar and Stock Market Rebound

There is one catalyst that could cause a dollar rally in tandem with the stock market in the near term.

As seen in the euro’s strong performance in August , a stimulus package might restore confidence in the dollar.

A new stimulus agreement would boost the dollar and also result in direct checks to individuals. Both factors could fuel a newfound stock market uptrend before the year’s end.

The six-month performance of the U.S. dollar index. | Source: Yahoo Finance 

But the issue remains the reluctance of Washington to agree on a stimulus proposal. Although the Republicans and Democrats have an agreement is near, the discussions remain at a stalemate.

As long as the stimulus stalemate continues, the threat against the dollar and the stock market will likely remain intact.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com and should not be considered investment or trading advice from CCN.com.