Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

U.S. Shares Plunged. Is Gold Next?

Commodities / Gold & Silver 2020 Sep 13, 2020 - 01:34 PM GMT

By: Arkadiusz_Sieron

Commodities The U.S. stock market plunged last week. Will gold follow suit?

Last week, the U.S. stock market has seen strong selling activity. The S&P 500 Index has declined about 7 percent from its peak, while the Nasdaq Composite Index plunged more than 10 percent (entering a correction territory), below 11,000, as the chart below shows. It was the tech sector’s worst drop since the end of March, if not the quickest correction ever.




What did happen? Well, the ultra-bulls would say that it was just a normal correction on the long-term bullish trend. The perma-bears would disagree, claiming that the day of reckoning had finally arrived. But what is the truth? Well, corrections happen from time to time, that’s for sure. However, it might be also the case that investors have finally realized that the recovery is much slower than previously anticipated. As we repeated many times, there will be no V-shaped recovery and the economy will not return to the pre-coronavirus levels for a longer time than people thought it would.

Another issue is that the economic uncertainty has increased recently. First, the U.S. presidential election is approaching quickly and the pre-election period is always a period of elevated volatility (and September and October are also historically months of increased volatility). And now there is an increased risk that the election’s results could be contested if there’s no clear outcome, because of the expanded voters’ access to voting by mail. Second, the U.S. Senate aims to vote today on a drastically scaled-back Republican coronavirus aid bill, despite the opposition from Democrats. The limited aid package or a delayed stimulus could raise doubts about the pace of economic recovery. Third, the Brexit saga stroke back, as new legislation by the British government raised fears of a derailment of trade talks with the EU. So, investors have been reminded that there are several downside risks to economic growth. What a surprise!

But it seems unlikely that with the current ultra-dovish Fed, which eagerly injects massive liquidity into economy and will maintain interest rates at ultra-low levels for years, the recent correction will transform into the full-blown bear market.

Implications for Gold

What does the correction in equities imply for the gold market? Well, the last week was not the best for the yellow metal, as one can see in the chart below. However, gold was relatively stable compared to shares. It makes, of course, sense, as the reckoning of slower recovery and more downside risks than previously thought should be positive for the gold prices, in contrast to equities. So, gold does not have to follow the stock market and plunge now.



The funny thing is that although gold is often considered to be uncorrelated or negatively correlated with the stock market, we could see upward moves in both asset classes. The reason is simple: the dovish monetary policy with negative real interest rates and massive liquidity should support both equities and the yellow metal. Gold could be also bought as a portfolio diversifier or portfolio’s protection amid the rising equity prices and concerns about the sustainability of the Fed-driven bull’s party at the Wall Street.

And I hope that you did not forget about the Fed’s revolutionary shift from targeting 2 percent to maintaining an average of 2 percent. Under the new regime, in which inflation above the 2 percent does not have to be a problem, the U.S. central bank would maintain the federal funds rate at ultra-low level for longer, which would increase risk appetite and support more volatility in asset prices and financial imbalances. In such a macroeconomic environment, the role of gold as a hedge against both inflation and stock market volatility could increase.

Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter.  Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today!

Arkadiusz Sieron

Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Arkadiusz Sieron Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in